The Bank of Japan has a 60% chance of raising interest rates in April! Will the oil price surge caused by the Iran war lead to an "August stock market crash" repeating itself?

After the Bank of Japan held steady in March, former monetary policy official Maeda said there is about a 50% chance of a rate hike in April, with the overnight swap market even pricing in a 60% probability. However, the oil price shock from the Iran war is causing the yen to face a conflicting dilemma.
(Background: BOJ Governor Ueda Kazuo: experimenting with yen settlement on blockchain)
(Additional context: Is the yen rebound hopeless? Sanae Takaichi persuades Ueda Kazuo “not to raise rates,” suggesting the BOJ may stay on hold in March)

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• Iran war gives stronger reasons to hike rates
• Will the “August stock crash” script repeat?
• Sudden crashes without warning are hard to replicate

Former BOJ official Maeda Eiji stated:

“Even if the Iran conflict introduces new uncertainties, the chance of a rate hike in April remains around 50%. The next hike is likely in April or June. Considering current uncertainties, both possibilities are roughly equal. This is an extremely difficult situation for the BOJ.”

The overnight index swap (OIS) market prices an even higher probability: traders currently price in about a 60% chance of a rate hike in April. The BOJ has maintained interest rates at 0.75% in March, the highest in 30 years, up from December last year. So, what’s next for the yen?

Iran war gives stronger reasons to hike rates

For the BOJ, the Iran war creates a conflicting case for rate hikes.

Japan is one of the world’s largest oil importers. Rising oil prices mean higher import costs, larger trade deficits, and increased downward pressure on the yen.

A weaker yen leads to more inflation from imports, which ironically increases the risk of falling behind the inflation curve.

Maeda Eiji clearly stated: “If the BOJ does not act in April, the yen could weaken further. If USD/JPY breaks above 160, it will increase the risk of falling behind market trends.” Currently, USD/JPY hovers around 156-157, not far from the 160 warning line.

The contradiction lies in the fact that geopolitical uncertainties should theoretically make central banks cautious, but the Iran war is shaking the yen’s status as a safe-haven currency. Japan, being an oil importer rather than an exporter, sees rising oil prices as bad news. Yet, instead of rising, the yen is falling further, reinforcing the case for rate hikes.

Will the “August stock crash” script repeat?

In August 2024, the BOJ suddenly raised rates by 0.25%, combined with weak US employment data, triggering a shocking crash. The Nikkei 225 plunged 12.4 in a single day, the worst since 1987, dragging global markets down. Bitcoin dropped from $62,000 to $49,000 in 48 hours, nearly $20,000 evaporated.

The core mechanism was a collective unwind of yen carry trades—borrowing yen (near zero interest), converting to USD, AUD, IDR, and other high-yield currencies, then investing in US stocks, cryptocurrencies, and emerging market bonds to earn interest and capital gains.

Estimated scale ranged from hundreds of billions to $4 trillion (including derivatives exposure). Once the yen strengthened, these leveraged trades had to be forcibly unwound, with institutions selling US stocks, currencies, and buying back yen, creating a vicious cycle.

If Japan raises rates again in April 2026, can this script be replayed?

Sudden crashes without warning are hard to replicate

To be straightforward, the probability of a full-blown crash exists but is not high. The main reason:

The August 2024 crash was driven by an “unexpected” event—the market was caught off guard by the BOJ’s rate hike pace. This time, the OIS market has already priced in a 60% chance of a rate hike in April, giving the market ample time to adjust carry trade positions.

Furthermore, the impact of the Iran war on the yen is counterintuitive. Traditionally, geopolitical risks should strengthen the yen (as a safe haven), but this time, the yen is under pressure. This indicates that current “safe-haven” funds are flowing into USD or gold, not yen. This reduces the likelihood of a sudden yen surge.

The only high risk would be if US-Iran conflicts do not cease in March but escalate in April (e.g., blocking the Strait of Hormuz, oil prices surpass $100), and the BOJ still decides to hike rates. The simultaneous shocks could trigger a broader unwinding similar to August 2024.

The USD/JPY 160 level is currently the most favored forex level and a key point investors should watch.

This is not investment advice; please do your own research and consider carefully.