Japanese inflation weakens as Bitcoin and the yen sail in stable waters

The Japanese Consumer Price Index showed an unexpected slowdown in December, but underlying inflation remains stubborn. Bitcoin trades around $88,000 after strong volatility earlier this week, while the Japanese yen slightly weakens in response to revised growth projections from the Bank of Japan.

Bitcoin trades at $88,000 after yen turbulence

Bitcoin [BTC] traded relatively stable on Friday around the $88,000 mark, after a sharp decline of more than 4.5% earlier this week when the price dropped to $88,000. The current 24-hour change is -2.52%, indicating cautious market sentiment. The Japanese yen fell by over 0.20% to 158.70 per US dollar, as a result of revised economic expectations.

These fluctuations set the stage for a fundamental shift in the relationship between the two assets. The 90-day correlation coefficient between Bitcoin and the yen reached an unusually high level of 0.84, indicating that the two assets are currently moving almost in sync – a phenomenon that deviates strongly from historical patterns.

Japanese inflation slows despite sticky underlying pressure

Japan reported on Friday the first inflation decline in four months, with the headline Consumer Price Index (CPI), reflecting the cost of daily goods, decreasing to 2.1% year-over-year in December, compared to 2.9% in November. This marked a sharp reversal after months of higher inflation. The Ministry of Internal Affairs and Communications released the data on Friday morning.

Core inflation – excluding fresh food – fell to 2.4% from 3% last month. However, deeper analysis revealed a less rosy picture. The core-core inflation, which excludes both fresh food and energy prices, only slightly decreased from 3% to 2.9%, suggesting that underlying price pressures remain persistent.

ING analysts noted that “apart from monthly fluctuations caused by energy subsidy programs, underlying inflationary pressures continue to persist.” This nuances the optimism of the initial inflation slowdown and points to a more complex inflation picture than the linkages suggest.

Bank of Japan maintains neutrality with upward revisions

Hours after the inflation figures, the Bank of Japan maintained its reference rate at 0.75% in an almost unanimous decision. However, the central bank made clear that it had revised upward its growth forecast and inflation projections for fiscal years 2025 and 2026 – a signal that underlying economic dynamics are believed to be stronger than previously estimated.

The central bank referred to support for expansionary fiscal policy, a cautious message that monetary policy normalization could continue if inflationary pressures persist. This shift in emphasis – from alarmism to gradual confidence – informed market reactions.

Rate hike reflects fiscal concerns and future expectations

The 10-year Japanese government bond (JGB) yield rose by 3 basis points to 1.12%, likely driven by ongoing fiscal concerns and traders’ expectations of further rate hikes by the BOJ in the coming periods. Earlier this week, yields spiked to multi-year highs, partly fueled by worries that tax cuts – promised by political parties ahead of February elections – would worsen government finances.

Rising Japanese yields have global repercussions. Borrowing costs worldwide, including in the United States, have increased, creating headwinds for risky assets, including equities and digital currencies like Bitcoin.

Correlation effect: How yen movements impact Bitcoin

The abnormally high 0.84 correlation coefficient between Bitcoin and the yen reveals a critical vulnerability for cryptocurrency holders. While Bitcoin has historically been considered a store of value – somewhat analogous to hard assets – it currently behaves as a high-beta risk hedge that closely follows carry trade unwindings and currency shifts.

Strategists suggest that the yen is likely to remain weak in the short term given rising interest rate differentials between Japan and other economies, which could be negative for Bitcoin given the strong positive correlation. This implies that investors seeking protection in traditional stores of value – physical gold and silver – which are less correlated with interest rate dynamics, may prefer them over digital tokens.

Outlook: Persistent inflation pressures and market volatility

Although inflation nominally declined in December, underlying price pressures remain stubborn and could support the Bank of Japan in continuing policy normalization in the coming quarters. For Bitcoin, this means ongoing volatility – not primarily driven by intrinsic crypto movements, but rather by macro-financial dynamics where the Japanese yen and interest rates play prominent roles.

The link between inflation trajectories, interest rate expectations, and currency movements will likely determine the yen-Bitcoin correlation. Given the stickiness of underlying inflation pressures despite falling total inflation, rate hike expectations may persist, potentially leading to further yen depreciation and volatility in risk assets in the coming months.