Will BOJ Play The Spoilsport?

The crypto market is eagerly awaiting two significant events that could influence its trajectory in the coming week. While anticipation builds for US president-elect Donald Trump’s inauguration on January 20, another occurrence might put a damper on the market’s bullish momentum—the Bank of Japan’s (BOJ) anticipated interest rate hike.

After a flash crash to $89,256 earlier this week, Bitcoin has recovered some of its losses, trading close to the psychologically crucial $100,000 level. The leading cryptocurrency is poised for a potential new chapter under the Trump administration, whose campaign prominently featured pro-crypto regulatory policies.

However, optimism surrounding Trump’s presidency might be tempered by the BOJ’s likely decision to raise interest rates. According to a chart shared by analyst Michael Kramer on X, there is a 90% probability that the BOJ will announce a rate hike on January 24.

It’s worth recalling that in August 2024, the BOJ’s interest rate hike triggered the infamous yen carry trade, which led to Bitcoin’s price plummeting to $49,000. A similar scenario could unfold if rates are increased again this year.

Higher interest rates typically strengthen the Japanese yen, reducing the appeal of risk assets like Bitcoin. This is because elevated rates lead to lower liquidity and higher borrowing costs, making speculative investments less attractive to high-risk, high-reward seekers.

This dynamic was observed during the US Federal Reserve’s (Fed) interest rate hikes in March 2022, which aimed to curb surging inflation but significantly impacted crypto assets.

It is worth highlighting that since 2016, the BOJ has maintained negative interest rates. However, in 2024, the central bank raised rates twice, from -0.1% to 0.25%. Although the expected rate for the upcoming meeting is 0.45%, this could change depending on Japanese inflation data set to be released on January 23.

If the inflation print surpasses expectations, it could unsettle digital asset markets, increasing the likelihood of another yen carry trade unwind. Notably, the headline inflation year-over-year is at 2.9%, the highest since August 2024.

Bitcoin Reaction Difficult To Predict

Although an interest rate hike by the BOJ is being viewed as bearish for digital assets, including BTC, it is not certain that digital assets will crash following the rate hike announcement.

For example, BTC held steady earlier this month, despite the US Fed suggesting fewer interest rate cuts in 2025 than initially expected. The central bank’s decision to slow interest rate cuts is largely due to the sticky inflationary pressures.

That said, crypto entrepreneur Arthur Hayes predicts that crypto may see a ‘harrowing dump’ around Trump’s inauguration. At press time, BTC trades at $98,212, down 1.1% in the past 24 hours.