Japanese Inflation Makes Everyone Worse: First Downturn in Four Months Didn't Save BTC from Crashing

Japan has finally gotten a breather from inflationary pressures, but that doesn’t mean the market has eased. In December, headline inflation in Japan fell to 2.1% per annum from 2.9% in November — the largest decline in the last four months. However, the nuance is that core inflation, which reflects significant price pressures in the economy, remained practically unchanged at 2.4%, which sends an alarming signal to the central bank. On Friday, after the announcement of these figures, the Bank of Japan decided to leave the benchmark interest rate at 0.75%, but at the same time raised its forecasts for future inflation and economic growth for 2025-2026.

For the markets, this was a mixed signal. Bitcoin, often referred to as “digital gold,” remained virtually unchanged at $83.53K (down 6.52% over the past day). The Japanese yen, in turn, weakened slightly by 0.20% to 158.70 per US dollar.

Core inflation keeps the Bank of Japan on standby

Although headline inflation has decreased, core inflation remains the real headache. ING analysts emphasized in their report that “with the exception of monthly divergences due to energy subsidy programs, underlying inflationary factors remain persistent and persistent.” This means that the main price presses in the Japanese economy have not relaxed.

This situation puts the Bank of Japan in a difficult position. On the one hand, inflation has decreased, which traditionally indicates the need to maintain rates. On the other hand, the persistence of core inflation and the improvement of economic outlooks suggest the possibility of further rate hikes in the coming months. According to the same analysts, “in the coming months, the central bank may go into standby mode, despite the persistence of core inflation.”

Impact on BTC and Japanese Yen: The Paradox of Synchronization

The recent correlation between Bitcoin and the Japanese yen has upended the usual notions of portfolio diversification. The 90-day correlation ratio between these two assets reached 0.84, perhaps the highest in the history of their interactions. This means that when the yen weakens, bitcoin traditionally strengthens, because the weak currency of Japanese investors stimulates a more active search for alternative assets abroad.

However, this week the scenario has changed slightly. Bitcoin remained within the range around $83-90K, while the yen weakened insignificantly, reflecting some market consideration for the Bank of Japan’s further actions. Strategists believe that the yen is likely to remain weakened in the near term, which, if the high correlation continues, creates unfavorable conditions for bitcoin.

Japanese bonds set the tone for an irritated market

The real catalyst for volatility was the dichotomy of Japanese government bond yields. The 10-year yield rose 3 basis points to 1.12%, hitting multi-year highs earlier in the week. The reasons are multifactorial: first, it reflects persistent fiscal concerns in Japan; Second, traders fear that the tax breaks promised by political parties on the eve of the February elections could further worsen the already critical budget situation in the country.

The rise in Japanese bond yields has a cascading effect on global markets. As Japanese bonds become more attractive with higher yields, Japanese investors begin to reallocate capital back to Japan, putting upward pressure on global borrowing rates. The result: the rise in the cost of borrowing in the US and other developed economies, which aggravates the situation of risky assets - from stocks to crypto assets, including bitcoin.

The market is reckoning with reality

On Tuesday, Bitcoin fell more than 4.5% to $88,000 in the wake of a global sell-off in risky assets. After that, he recovered somewhat, but remained under pressure. These pressures reflect a broader trend where investors are reassessing the measure of risk they are willing to take in the face of upward pressure on global interest rates and uncertainty about the future monetary policy of the world’s largest central banks.

It is important to understand that Japanese inflation itself, although declining, remains quite high for this region of the world. As a result, the Bank of Japan has fallen into a monetary balancing mode, where every decision has global consequences. Holding rates at persistent core inflation may stimulate further weakening of the yen, which in turn will provoke new fluctuations in the crypto asset markets, where BTC remains under the scrutiny of global investors.