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Nikkei Hits Record High on U.S.-Iran Deal, but a Rate Hike Looms

The Nikkei surged to a record after the U.S.-Iran deal, but the Bank of Japan's expected rate hike could quickly turn market sentiment.

By Zenz van der Wielen
• 2 min read
Nikkei Hits Record High on U.S.-Iran Deal, but a Rate Hike Looms

Key Takeaways

  • The Nikkei broke above 69,700 points for the first time after a U.S.-Iran deal sparked a broader stock rally.
  • Oil prices dropped sharply, while stocks and crypto moved higher; Bitcoin headed toward $66,000.
  • The Bank of Japan is expected on Tuesday to raise rates from 0.75% to 1%, which could hit the carry trade and risk assets.

Japan's Nikkei stock index broke above 69,700 points for the first time. On Monday, the index hit an intraday high of 69,705, up more than 5%, after news of a deal between the United States and Iran to end their conflict sparked a broader rally across stock markets.

Impact of the U.S.-Iran Deal on Markets

The deal, announced by President Donald Trump, includes ending the U.S. naval blockade of Iran and reopening the Strait of Hormuz, a key oil shipping route. That sent oil prices lower, with West Texas Intermediate down about 4.6% and Brent Crude falling around 5%. At the same time, stocks and cryptocurrencies reacted positively: U.S. futures rose sharply, including a 1.4% gain for Nasdaq 100 futures. Moves were also strong in Asia, with South Korea's KOSPI leading the way with a 5.46% gain and Japan's Topix up 3.3%.

The crypto market also benefited from the positive sentiment. The total market cap of cryptocurrencies rose nearly 2%, with Bitcoin (BTC) moving toward $66,000. That lines up with the market's earlier reaction to the deal: Bitcoin rose above $65,500 after the U.S.-Iran deal and falling oil prices showed how quickly geopolitical easing can support risk assets.

Bank of Japan Rate Hike Threat

Even with these upbeat developments, sentiment could turn fast. The Bank of Japan (BOJ) is widely expected to raise its policy rate from 0.75% to 1% on Tuesday. That would be a major policy shift, given decades of ultra-low rates aimed at fighting deflation and supporting economic growth.

Higher rates make borrowing in yen more expensive, which reduces the appeal of the so-called yen-funded carry trade. In this strategy, investors borrow yen at low rates to invest in higher-yielding assets abroad, such as stocks, bonds, and cryptocurrencies. As those borrowing costs rise, the trade becomes less profitable, which could lead to capital flowing back to Japan. That could put pressure on global stock markets and riskier assets.

Markets have mostly already priced in the rate hike, so the focus will be on the BOJ's guidance about what comes next. Economic forecasts suggest the BOJ could raise rates further to 1.25% later this year. A tighter policy move than expected could have a strong impact on stocks, cryptocurrencies, and other risk assets.

Why This Matters for European Investors

For European investors, this matters because changes in BOJ monetary policy can affect global capital flows and currency markets. A rate hike that slows the carry trade could lead to volatility in risk assets, including cryptocurrencies like Bitcoin, which trade globally. That makes it important to watch international monetary policy decisions when judging market risks and opportunities.

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