Bitcoin's 21% rally at risk from Bank of Japan's September hike

Bitcoin traded at $77,202 after a 21% weekly rally, with the Crypto Fear and Greed Index at 73, ahead of the Bank of Japan's Sept. 18 policy meeting.

"The BOJ probably won't explicitly say the next hike will come in September. Instead, officials are likely to indicate the need for an early hike by emphasizing upside inflation risks," Kento Minami, senior economist at Daiwa Securities, said.

Markets have sharply increased bets on a hike, with overnight-index swaps pricing an 82% probability, up from about 23% before the July meeting. The yen traded near 160 per dollar, giving the BOJ room to sound dovish without risking renewed depreciation.

A surprise hike in July 2024 triggered a sharp global market selloff, and traders are positioning for higher Japanese rates that could hit the yen, Japanese bonds, stocks, and global markets — including crypto.

Japan's bond market adds stress

Japan's 10-year government bond yield has risen to about 2.95%, the highest since 1996, as inflation and expectations of further BOJ tightening increase. For decades, Japanese yields were extremely low, pushing investors into higher-yielding overseas assets such as U.S. Treasuries and European bonds. Now, rising JGB yields make Japanese bonds more attractive, potentially reducing Japanese demand for foreign debt.

"That matters far beyond Japan," Global Markets Investor said. If Japanese investors buy fewer U.S. Treasuries, Treasury prices could fall and yields could rise, increasing U.S. government borrowing costs. Higher Treasury yields can also raise mortgage and corporate borrowing costs and pressure U.S. stocks. "The debt crisis is not just a U.S. story," the firm said.

Bitcoin's rally has pushed its relative strength index into overbought territory, hinting at a pullback from sellers. The Fear and Greed Index jumped to 62 on Aug. 20, up 16 points in a single day, as Bitcoin surged beyond $72,000, before reaching 73.

The transmission chain is clear: a BOJ hike would strengthen the yen, unwind carry trades funded in yen, and drain liquidity from risk assets including Bitcoin. That dynamic, combined with an overbought RSI, leaves the rally vulnerable to a sharp correction if the BOJ delivers on Sept. 18. If the BOJ holds or sounds dovish, the rally could extend.

This article is for informational purposes only and does not constitute investment advice.