Bitcoin struggles with inflation over the past 5 years while Japan hesitates on interest rate hikes

The recent receipt of inflation data from Japan indicates that Bitcoin is increasingly influenced by global price pressures. While core inflation in Japan decreased to 2.4% in December from 3% earlier, the deeper inflation component remains stubbornly robust, complicating further monetary normalization.

Japanese inflation declines but underlying price pressures remain persistent

The Consumer Price Index (CPI) in Japan showed a significant decrease to 2.1% year-over-year in December, a clear contrast to 2.9% in November. This marks the first inflation decline in four months. However, Japan’s Ministry of Internal Affairs and Communications reported that core-core inflation, excluding fresh food and energy costs, only slightly decreased from 3% to 2.9%.

According to ING analysts, this pattern indicates that “apart from monthly fluctuations due to energy subsidy programs, underlying price increases remain persistent.” This stubborn inflation presents a continuous challenge for policymakers and investors seeking stability in financial assets.

Bitcoin and yen respond cautiously to BOJ’s stable interest rate

The Bank of Japan maintained its interest rate unchanged at 0.75% and simultaneously raised its growth and inflation forecasts for fiscal 2025 and 2026. Market reaction was cautious: Bitcoin showed little dynamism and traded near $88,000, while the Japanese yen weakened slightly to 158.70 per US dollar.

The 10-year Japanese government bond yield (JGB) rose by 3 basis points to 1.12%, supported by fiscal concerns and expectations of further BOJ rate hikes. This rate hike in Japan potentially had a counterproductive effect on risky assets worldwide, including Bitcoin.

Why the correlation between Bitcoin and yen is crucial at this stage

The 90-day correlation coefficient between Bitcoin and the Japanese yen reached 0.84 at the time of analysis, indicating a very strong positive correlation. Strategists warn that further yen depreciation is likely in the short term, a scenario that could be bearish for Bitcoin given this close linkage.

Bitcoin fell more than 4.5% last week to around $88,000 after Japanese interest rates experienced upward pressure. Since then, price action has remained largely flat, indicating that investors are cautious about further movements until more clarity emerges on the inflation trajectory.

Long-term perspectives: Bitcoin in a world of persistent inflation

Over the past 5 years, global inflation has had a transformative effect on the valuation of risky assets. Bitcoin initially positioned itself as an inflation hedge, but current market dynamics suggest that the relationship has become more complex. The ongoing inflation in Japan, despite recent declines, underscores how central banks need to be cautious with interest rate hikes.

ING analysts added that “persistent core-core inflation may support further policy normalization, but the waning inflation figure could lead to a wait-and-see stance in the coming months.” This scenario creates uncertainty for Bitcoin, which is currently treated as a risky asset rather than an inflation hedge.

The coming months will be crucial: if Japan’s inflation over the past 5 years serves as inspiration, the market knows that deeper inflation components are difficult to contain. Bitcoin holders should remain alert to volatility induced by interest rate hikes.