Japan's BOJ to raise rates by 25 bps, risk assets face flash crash risks

Original | Odaily Planet Daily (@OdailyChina)

Author | Qin Xiaofeng (@QinXiaofeng 888 )

According to Nikkei, the Bank of Japan (BoJ) is expected to raise the short-term policy rate from 0.75% to 1.0% at its monetary policy meeting on June 15–16, marking the highest policy rate since 1995. Market pricing currently reflects a very high probability of a rate hike, with the probability of a 25-basis-point increase on PolyMarket surging from 25% in early April to 98%.

The BOJ is nearing an interest rate hike, which could force a large number of investors engaged in yen carry trades to sell overseas assets, convert back to yen, and repay loans, triggering a chain reaction that amplifies volatility in global risk assets—the August 2024 flash crash serves as a prime example, when the yen's sharp rally caused a brief but severe drop in global stock markets and Bitcoin plunged nearly $20,000 in a single day, with a maximum decline of 15%.

Odaily Planet Daily will analyze the macroeconomic context and transmission mechanisms of the BOJ's interest rate hike, with a focus on assessing the risk impact on AI tech stocks and cryptocurrencies for readers' reference.

Over the past two years, hawkish voices within the BOJ have grown stronger, ultimately ending its 17-year-long negative interest rate policy in March 2024 by raising the policy rate from -0.1% to a range of 0% to 0.1%, marking the first rate hike in this cycle. In July 2024, the BOJ raised rates by another 15 bps to 0.25% and announced a gradual balance sheet reduction; in January and December 2025, it hiked rates by 25 bps each time, bringing the rate to 0.75%; and the first three meetings of 2026 held rates steady. Below are the BOJ’s rate hike decisions at several meetings:

After maintaining interest rates unchanged for six months, why has the BOJ rushed into a new round of rate hikes? This rate hike is primarily driven by two factors.

First, energy shocks and imported inflationary pressures. As the Middle East conflict in the first half of the year caused oil price volatility, Japan, a country highly dependent on imported energy, saw a significant rise in import costs. In May, the Corporate Goods Price Index (CGPI) rose 6.3% year-over-year, the fastest pace since 2023, with petroleum products up 9.6% and utilities up 8.5%. The BOJ forecasts that core CPI for fiscal year 2026 will reach 2.5–3.0%, far exceeding its 2% target.

Second, the weakness of the yen has intensified imported inflation. The current USD/JPY exchange rate has been persistently hovering near the high end of the 158–160 range, approaching historical extremes of weakness. The yen’s sharp depreciation has directly eroded Japanese companies’ purchasing power for imports, significantly raising the cost of energy, raw materials, and other commodities, further pushing up domestic price levels. Although the Japanese Ministry of Finance has intervened in the foreign exchange market multiple times, the effects have been limited and unsustainable. This situation is pressuring the BOJ to tighten monetary policy—at its June meeting—by raising interest rates to prevent inflation expectations from spiraling out of control.

On June 3, BOJ Governor Kazuo Ueda clearly shifted toward an inflation-fighting narrative, emphasizing that if the upside risks to prices outweigh the downside risks to the economy, the benefits and drawbacks of raising interest rates must be discussed.

Reuters cited three informed sources reporting that, barring a sharp escalation in the Middle East conflict, the BOJ will raise interest rates in June and may slow the pace of balance sheet reduction to maintain market stability. Bloomberg and institutions such as ING also maintain similar expectations, forecasting a total of 50 bps in BOJ rate hikes by 2026.

This series of shifts marks Japan’s transition from the “world’s last lender” to a normalized central bank, directly challenging global assets that rely on cheap yen financing.

The Bank of Japan has long maintained an ultra-loose monetary policy, and yen carry trades have been a significant component of global liquidity over the past decade. Investors borrow yen at near-zero interest rates and invest in high-yield assets such as U.S. stocks, technology stocks, emerging markets, and cryptocurrencies to profit from interest rate differentials and capital gains.

The BOJ's rate hike will directly increase the cost of yen financing and may trigger yen appreciation (USD/JPY downside), forcing leveraged investors to close positions, creating a positive feedback loop: yen appreciation leads to larger foreign exchange losses → higher financing costs → forced deleveraging by investors → large-scale selling of risk assets → further declines in asset prices → more stop-loss orders triggered → increased pressure to close positions.

Historically, every signal of policy tightening from the BOJ has triggered significant market volatility.

On July 31, 2024, the BOJ raised interest rates by 15 bps to 0.25% and announced a gradual balance sheet reduction, compounded by weak U.S. employment data, triggering severe global market turmoil. At the time, South Korea’s two major stock indices, KOSPI and KOSDAQ, both plummeted and triggered circuit breakers; Japanese equities collapsed, with the Nikkei 225 dropping 12.4% in a single day and over 20% for the week—the worst performance since 1987. Global equities declined in tandem, with U.S. markets and tech stocks also adjusting, while the VIX fear index surged. Cryptocurrencies were similarly battered, with Bitcoin and ETH plunging more than 30% within a week amid a sharp spike in leveraged liquidations.

According to Morgan Stanley, although significant positions have been unwound since 2024, approximately $500 billion in outstanding yen-funded positions remain in the market. Although some risks have already been priced in, these positions still pose a substantial threat. Morgan Stanley warns that a rapid appreciation of the yen could trigger a cascade of forced liquidations during periods of low liquidity, particularly impacting highly leveraged assets.

J.P. Morgan’s Global Market Strategy Head Dubravko Lakos-Bujas and FX Strategist Meera Chandan both noted that the policy divergence between the BOJ and the Fed will intensify the instability of carry trade unwinds, potentially leading to a repricing of global risk assets.

The AI-driven tech boom was the main theme of the U.S. stock market in the first half of 2026, with chip stocks like Nvidia and Broadcom, along with hyperscale cloud providers, leading Nasdaq to repeatedly set new highs.

However, in June, the market saw significant rotation and pullback, particularly on June 5, when U.S. equities experienced their most severe single-day correction since 2026. The Nasdaq plunged 4.18%, marking its largest single-day drop since April 2025; the S&P 500 fell 2.64%, ending a nine-week winning streak; the Dow declined 1.35%; and the FANG+ Index tumbled over 10%, with AI core stocks such as NVIDIA, Broadcom, Micron, and Marvell leading the losses. (Recommended reading: “Nasdaq Drops 4.2% in Single Day: Does ‘Black Friday’ Puncture the U.S. Stock Bubble?”)

The U.S. stock market correction is driven by macro factors such as geopolitical tensions and uncertainty around Fed policy, but an equally significant factor is the potential rate hike from the BOJ.

First, liquidity tightening will directly hit high-valuation growth stocks. AI companies require massive capital expenditures and are highly dependent on cheap financing. The unwinding of yen carry trades will reduce global risk-on capital inflows, with high-beta tech stocks bearing the brunt. Semiconductor leaders such as Nvidia and Broadcom, as well as hyperscalers like Meta and Microsoft, are highly sensitive to valuations and极易遭受抛售. Investing.com analysis notes that high-valuation growth sectors are most sensitive to global liquidity shifts, and once carry trade unwinding begins, rapid deleveraging often follows.

Second, rising energy costs will significantly compress AI profit margins. The Middle East conflict has driven up oil prices, causing substantial increases in electricity and cooling costs for data centers, while together with the BOJ's rate hikes, creates a "stagflation-like" macroeconomic environment that severely tests the sustainability of AI business models.

BitMEX founder Arthur Hayes explicitly warned in his latest article, "Reality Test": "Energy realities are testing the market's current 'dreaming' state." High oil prices not only increase operational costs but may also slow the growth of enterprise token usage, further undermining AI-related revenue expectations.

Finally, there is the massive IPO supply shock and political regulatory risk. Giants such as SpaceX, Anthropic, and OpenAI plan to conduct a concentrated wave of IPOs in the second half of 2026, with valuations often reaching hundreds of times their sales. The expiration of lock-up periods will create substantial supply pressure. Meanwhile, Trump may shift toward anti-AI policies ahead of the midterm elections, increasing regulatory uncertainty.

Cryptocurrencies, as the highest-beta risk asset globally, face an even more pessimistic outlook. On one hand, yen rate hikes have increased financing costs, directly raising the cost of global leveraged trading and forcing large-scale liquidations of crypto leveraged positions. On the other hand, in the competition for liquidity with AI, AI-related capital expenditures have absorbed substantial market funds, leaving crypto already at a disadvantage—further tightening marginal liquidity as the BOJ acts.

Analyst Lockridge Okoth of Yahoo Finance stated that a 98% probability of an interest rate hike could trigger the next liquidity shock for Bitcoin. Investing.com analysis notes that yen appreciation and BTC weakness often move in tandem, serving as a classic signal of rising global risk aversion.

Arthur Hayes has also emphasized in multiple analyses that the dynamics of the yen carry trade remain one of the key variables influencing Bitcoin’s liquidity, urging investors to monitor policy signals that may trigger short-term liquidity shocks. In recent articles, Arthur Hayes highlighted the need to be cautious about the combined impact of short-term energy costs and monetary policy risks; BTC/ETH may briefly adjust with risk assets, but their long-term trajectory depends on the restart of liquidity.

The renewed concern over BOJ rate hikes is not an isolated event, but a signal of global liquidity tightening. In particular, the current Middle East geopolitical tensions driving up oil prices, AI-related capital expenditures consuming liquidity, and uncertainty around Fed policy have collectively further compressed the buffer space.

For investors, global risk assets—particularly highly leveraged and overvalued sectors such as AI tech stocks and cryptocurrencies—may face significant correction pressure in the short term, with volatility likely to rise sharply; heightened caution and awareness of leverage risks are essential.