- The Bank of Japan (BOJ) is expected to raise interest rates at its June meeting.
- This is because tensions in the Middle East continue and oil prices remain high.
- However, a BOJ rate hike could hit both crypto and Nvidia adversely
The Bank of Japan (BOJ) is widely expected to raise interest rates at its June meeting as tensions in the Middle East continue and oil prices remain high.
Last week, Bank of Japan policy board member Junko Koeda told business leaders that it was “reasonable” for the BOJ to raise the interest rate “at an appropriate pace” to tackle inflation while considering the trade-offs for the country's economy, the Wall Street Journal reported.
The comments are likely to fuel expectations of a rate hike in June as it grows concerned about the possibility of a rise in oil prices furthering inflation.
However, a BOJ rate hike could hit both crypto and Nvidia adversely. In 2024, a 15 basis point rate hike by the BOJ wiped out $270 billion in crypto, and the Nikkei slumped 12.4%, as per Investing.com.
Not just that, Nvidia was also impacted. The shares of the tech giant fell almost 27% from its June 2024 peak by early August, and the sharpest decline coincided with the BOJ rate hike.
The economic situation seems geared towards a rate hike. The yield on Japan's 10-year government bond surged to 2.8% earlier this month, its highest since October 1996. To hold its current 0.75% policy rate, the BOJ would have to absorb unwanted bonds as well as print yen. This carries the risk of negatively affecting the currency further. The easier path is to raise interest rates and let the bond market settle.
But for many investors, Japan has been one of the heaviest sources of money, with investors borrowing yen at near-zero rates, converting it into currencies with higher yields and using that in global risk assets. When funding is cheap, investors borrow to purchase risk assets. But a hike in rates and a strengthening of the yen means that the situation is reversed.
Crypto is one of the most liquidity-sensitive asset classes and is dominated by leveraged participants. The asset trades 24/7 and functions as an early warning signal for the market. If the yen rises sharply and Bitcoin weakens after a BOJ hike, it means investors will exit quickly.
Similarly, Nvidia's stock is highly liquid, profitable and crowded. The stock alone accounts for roughly 8% of the entire S&P 500, the highest single stock concentration in the index.
Like crypto, Nvidia's stock reflects global risk appetite and profits from cheap liquidity provided by the yen. A rate hike by the BOJ risks upending this. If the yen rises sharply after a hike, both assets may see a sell-off.
