Yen-Backed Stablecoin Can’t Come at a Better Time as BOJ Seen Raising Rates

What to know:

• Japan is set to launch a blockchain-based version of the yen, with the Financial Services Agency likely to approve the first yen-denominated stablecoin this fall.
• The Bank of Japan is expected to raise interest rates soon, which could increase the appeal of yen-backed assets and stablecoins.
• Rising Japanese government bond yields and a strengthening yen are impacting the BTC/JPY exchange rate, which has dropped 8% this month.

One of the biggest stories emerging from the Far East this month is the imminent launch of a blockchain-based version of the Japanese yen, one of the world’s major fiat currencies.

The timing for this development couldn’t be better, as the Bank of Japan (BOJ) is widely expected to raise interest rates soon, a move likely to increase the appeal of both the yen and yen-backed assets.

Earlier this month, CoinDesk reported that Japan’s Financial Services Agency (FSA) is likely to approve the country’s first yen-denominated stablecoin as early as this fall. According to the report, Tokyo-based fintech firm JPYC plans to register as a money transfer business within the month and will spearhead the rollout of a JPY-pegged stablecoin, which will trade at a 1:1 ratio with the Japanese yen.

Stablecoins are cryptocurrencies that are pegged to an external reference, such as the U.S. dollar, euro, or yen. These tokens play a crucial role by facilitating capital transfers used for trading, investing, remittances, or international payments, all while bypassing the volatility typically associated with other cryptocurrencies.

JPYC is not alone in pursuing a yen-pegged stablecoin. Last week, Tokyo-based financial services company Monex Group announced that it is considering launching its own JPY stablecoin aimed at international remittances and corporate settlements. Oki Matsumoto, Chairman of Monex Group, told local media, “Issuing stablecoins requires significant infrastructure and capital, but if we don’t handle them, we’ll be left behind.”

Both leading bankers and traders expect the BOJ to hike rates in the coming months, while the U.S. Federal Reserve is seen doing the opposite.

Hiroshi Nakazawa, head of Hokuhoku Financial Group, one of Japan’s largest regional banks by assets, said over the weekend that the BOJ could raise interest rates in either October or December, assuming “things go smoothly.”

Shares in Hokuhoku Financial Group have been the best-performing banking stocks this year, with prices rallying 90% to top the Topix banks index, which includes 70 lenders.

Nakazawa’s outlook aligns with the broader market consensus on upcoming rate hikes. According to Bloomberg Economics, the recently released Tokyo inflation report likely reinforced the BOJ’s view that consumer price momentum remains strong, on track to reach its 2% target. The team forecasts a 25 basis point rate hike at the BOJ’s October meeting.

The anticipated rate hike could prompt investors to move funds into JPY-backed stablecoins. Recall that the 2022 Fed rate hike cycle was seen as boosting demand for USD-pegged stablecoins, although the appeal of stablecoins was later temporarily dented by the Terra crash in May 2022.

The BOJ raised rates twice in recent years, from 0.1% to 0.25% in July last year and then another 25 basis point hike in January. Since then, the central bank has kept rates steady.