December rate decisions in Japan and US cast shadow over bitcoin

Japan's core inflation rate climbed to a level above the central bank's 2% threshold in September, a milestone not seen in three quarters. This latest reading adds weight to arguments that the Bank of Japan (BOJ) will raise rates in December, a month which also features a widely expected move from the Federal Reserve.

Next week the BOJ is widely seen as staying on hold. Its forward guidance, however, could set the direction for a bitcoin (BTC) market that is already losing ground.

Inflation Broadens Beyond Fuel Costs

According to Reuters, the core consumer price index, a measure that leaves out fresh food, hit 2.1%, up from the 1.7% recorded in August. A broader gauge that also excludes fuel expenses reached 2.4%, compared with 1.9% previously.

Goods inflation accelerated to 2.8% from 2.6% in August, as CNBC noted, despite a 20.6% drop in rice costs. Services inflation, meanwhile, gained pace, moving to 1.5% from 1.2%.

The central bank will incorporate these fresh data points into its updated economic projections when its next two-day policy gathering wraps up on October 30.

Two Central Bank Meetings in December Loom Large for Bitcoin

The BOJ lifted its policy rate to 1.25% in September, marking the highest level in 31 years. A Reuters poll indicates most analysts predict a further increase to 1.50% in December, with the terminal rate landing at roughly 1.75% or 2.00%.

Capital Economics' head of Asia-Pacific, Marcel Thieliant, anticipates the BOJ staying on hold while remaining alert to the risk that inflation moves to the upside.

“With little evidence that the tightening delivered so far has slowed the economy, the risks are shifting towards a higher peak in the policy rate than our forecast of 2%,” he said.

Across the Pacific, data from CME FedWatch places the probability of the Fed raising its target range by December 9 at 80.5%.

The likelihood of a Fed adjustment at its October 28 meeting now sits at just 7.2%, a steep decline from the 55.4% recorded a month before. The BOJ is then scheduled to meet on December 17 and 18.

Yen Carry Trade Puts Bitcoin in a Vulnerable Position

The policy moves from both monetary authorities could impact bitcoin via the yen carry trade. If Japanese interest rates keep climbing, investors who borrowed yen to fund higher-risk bets might close out those trades, creating potential headwinds for cryptocurrency markets.

An increase from the Fed could mitigate some of this strain by propping up the US dollar. Should both institutions lift rates by comparable magnitudes, the interest-rate spread between the US and Japan would stay mostly steady, reducing the urge to dismantle carry positions.

Following the BOJ's rate increase to 0.25% in July 2024, bitcoin dropped from roughly $70,000 to $49,000. According to BeInCrypto, the cryptocurrency remained stable before the September tightening even as Japanese assets experienced selling.

At present, the digital asset enters the December period in a weaker state. At the time of writing, bitcoin was trading at $81,293, a 3.16% decline in the preceding 24 hours, according to BeInCrypto Markets.

Over the last month, the coin has shed 5.6% of its value. It topped out above $86,000 in the first half of October, and efforts to push higher since October 9 have consistently been capped below the $84,000 mark.

That gives bitcoin less breathing room if the BOJ's October 30 guidance takes a hawkish turn.