U.S.-Japan divergence drives Bitcoin volatility: Low inflation but underlying pressures persist

The dynamic between Japan and the United States in global financial markets intensified this week, with profound implications for risk assets such as Bitcoin. While Japan surprises with an inflationary slowdown, the divergence of monetary policies between the two nations is redefining the global investment landscape.

Japan sees first inflation slowdown in four months as U.S. watches

Japan’s headline Consumer Price Index fell to 2.1 percent in December, down sharply from the 2.9 percent reported in November, according to data from the Ministry of Internal Affairs and Communications released on Friday. This was the first slowdown in headline inflation in four consecutive months.

However, beneath the surface of this price drop, inflationary tensions persist that complicate the outlook for policymakers. Core inflation, which excludes fresh food, eased to 2.4% from 3%, while core inflation — excluding both fresh food and energy — fell only slightly to 2.9% from 3%.

Analysts at ING point out that “beyond the fluctuations caused by government energy subsidy programs, fundamental inflationary pressures remain resilient.” This poses a dilemma for the Bank of Japan: headline inflation suggests room for caution, but persistent core inflation would warrant more aggressive policy normalization.

Bank of Japan maintains policy as global markets await Fed response

Shortly after these numbers, the Bank of Japan confirmed its benchmark borrowing cost at 0.75% in a near-unanimous decision. The Japanese central bank raised its growth and inflation projections for fiscal years 2025 and 2026, justifying its cautious approach under a context of expansionary fiscal support.

The BOJ’s decision creates a stark contrast to anticipation in the United States, where investors speculate about the timing and depth of future rate cuts by the Federal Reserve. While Japan maintains its defensive stance, the U.S. market remains attentive to how the Fed will respond to global inflationary pressures.

Bitcoin-yen correlation strengthens: how divergent policies affect risk assets

Bitcoin traded with no notable movement on Friday, consolidating at levels near $90,000 based on early market reactions. However, more recent data shows a 5.39% drop in 24 hours, with the asset trading at $84.64K, reflecting the volatility accumulated during the week.

The Japanese yen retreated slightly more than 0.20% to 158.70 per US dollar following the BOJ announcement. Most notably, the 90-day correlation between Bitcoin and the yen remains solid at 0.84, demonstrating how assets that historically followed independent dynamics are now moving in unison.

This connection reflects a deeper reality: when Japan maintains low rates and the yen weakens, investors are looking for higher returns in alternative assets like Bitcoin. Conversely, when restrictive policies in the United States strengthen the dollar, it pressures both assets simultaneously.

Rising yields: Japan’s cascade effect towards the US and beyond

The yield on Japanese 10-year government bonds (JGB) rose 3 basis points to 1.12%, a move that expresses broader concerns about Japan’s fiscal trajectory. Yields hit multi-decade highs earlier in the week, fueled by fears that promised tax cuts ahead of the February election will deteriorate the nation’s fiscal position.

This increase has immediate global effects. Rising Japanese yields are driving up financing costs around the world, including in the United States. Money that sought higher returns in Japanese bonds is now migrating into U.S. markets, pushing up Treasurie yields and creating a headwind for risky assets such as Bitcoin and stocks.

Last Tuesday, Bitcoin fell more than 4.5% to $88,000, reflecting this cascade of pressures from the global yield complex. Since then, the market has recovered modestly, showing resilience but no clear conviction.

The Perfect Storm: How the U.S. Responds to the Changing Japanese Scenario

The question now that will occupy both investors in the United States and in Japan is how global politics evolve from here. If Japan finally accelerates its rate hikes under persistent underlying inflationary pressure, the United States could face additional financing pressures. This would further complicate the Fed’s position.

Meanwhile, WTI and Brent oil prices have risen 12% this month, adding another layer of inflationary pressure that will make it harder for central banks, both in the U.S. and elsewhere, to execute rate cuts quickly. Bitcoin “bulls” were hopeful with policy reliefs that now seem to be receding.

The divergence between Japan and the United States is rewriting the rules of the game for global markets, and Bitcoin, with its increasing correlation with interest rate dynamics, is at the epicenter of this transformation.