- Japan's new Prime Minister has historically been very hawkish.
- Markets are already mulling the effects of another rate hike.
The election of Shigeru Ishiba as Japan’s new Prime Minister on Monday has sent Japanese stocks and other risk assets tumbling.
Bitcoin, which traded as high as $66,300 over the weekend, sunk 4% to around $63,500.
The reason: Ishiba has previously supported the Bank of Japan to raise interest rates. He also backs other hawkish policies, such as raising corporate taxes.
In July, Japan’s central bank raised interest rates for the second time this year, wiping out billions of dollars from the crypto market.
Investors fear another hike could be even worse.
Contrary to the market reaction, Steven Glass, an analyst at Sydney-based investment firm Pella Funds Management, said Ishiba’s election increases his firm’s resolve that Japan’s central bank won’t further raise interest rates.
“The BoJ is highly unlikely to increase its policy rates,” Glass said on CNBC’s Squawk Box. That’s because the Japanese economy couldn’t endure another rate hike, nor is inflation high enough to warrant it, he said.
The election news comes after Bitcoin rallied some 20% in September, defying market expectations.
A 0.5% interest rate cut from the Federal Reserve and monetary stimulus from the Chinese government has loosened financial conditions, boosting riskier assets like crypto.
Given how impactful the Japanese yen is on crypto markets, the latest rally could be curtailed.
‘Important macro variable’
BitMEX founder Arthur Hayes has talked about the impact of Japan’s economic policy on the crypto market.
“The yen is the most important macro variable,” Hayes previously told DL News. It will determine the prices of crypto, tech stocks, and US debt going forward, he said.
In May, Hayes argued that Japan’s weak yen could ignite a crypto rally that sends Bitcoin to new heights.
But when the Bank of Japan raised interest rates in July, it strengthened the yen, forcing Japanese investors to unwind carry trades by selling US stocks and bonds.
A carry trade is a strategy where an investor borrows capital at a lower interest rate — like the Japanese yen — to invest in assets with potentially higher returns.
The result was a sharp selloff of stocks globally.
Bitcoin didn’t escape the carnage, dropping below $50,000 for the first time since January in the aftermath.
While raising rates can help combat inflation, it also often strengthens a country’s currency. This makes exports less competitive, which could be a problem for Japan’s export-heavy economy.
Still, any sign that the Bank of Japan will raise interest rates again could start another selloff.
With more US interest rate cuts predicted for the rest of the year, crypto bulls are in control — at least for now.
Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.