The yen is again nearing a 40-year low against the dollar, making the Bank of Japan's policy rate decision this week a key variable for the cryptocurrency market. Markets treat a hold as a foregone conclusion, but attention is on how any signal of further tightening could affect yen carry trades and global liquidity.

Cointelegraph, a blockchain outlet, reported on July 28 that the dollar-yen rate neared 164 yen, hovering around last week's 40-year high.

Attention is focused on the BOJ monetary policy meeting on July 31 and Aug. 1. Japan's policy rate is now 1.0 percent, the highest level since 1995, but markets see a high chance of no change at this meeting. Implied market probabilities price a 98 percent chance of a hold, while prediction market Polymarket put the likelihood of rates being maintained at 99 percent.

Still, the market's focus is on the policy path after the meeting rather than the outcome itself. In a summary of its June meeting, the BOJ said it was appropriate to keep raising the policy rate and adjust the degree of monetary easing while monitoring economic and price trends, as the rise in core consumer prices is approaching 2 percent and financial conditions remain accommodative.

The issue is that yen weakness is persisting despite the rate-hike stance. Even after the BOJ raised rates in June, the dollar-yen rate stayed above 160 yen. In its April economic and price outlook report, the BOJ said recent corporate wage and price hikes have increased the impact of exchange rate moves on prices compared with the past. It said exchange rate changes could also affect underlying inflation by stoking inflation expectations.

The cryptocurrency market is watching the BOJ meeting because of its link to yen carry trades. The yen has long served as a key funding currency for global investors on the back of low interest rates, and that money has flowed into risk assets including cryptocurrencies.

If the BOJ strengthens its tightening stance or moves to defend the yen, carry-trade unwinding could accelerate, potentially squeezing global liquidity. In August 2024, Japanese authorities' intervention in the foreign exchange market triggered a sharp unwind of yen carry trades and applied substantial selling pressure to bitcoin and altcoins. With the dollar-yen rate back near a 40-year high, some in the market do not rule out a similar shock being repeated.

Market analyst Ricky Ho said that for yen carry trades to be sustained, Japan's interest rates must remain low and the yen must also stay stable or continue weakening. He warned that because carry trades often involve high leverage, unwinding frequently happens sharply over a short period rather than gradually.

He also stressed that while the market is focused only on whether the timing of the BOJ's next rate hike will be September, October or December, what matters more is that the direction of Japan's monetary policy has already shifted to tightening.

Markets see the key to this BOJ meeting as not simply whether rates are held, but how the BOJ assesses yen weakness and rising prices and what signals it gives on the possibility of further tightening. The BOJ's policy direction is expected to have a significant impact on the cryptocurrency market through yen carry trades and global liquidity.