Japan's New Prime Minister Sparks Market Concerns, Bitcoin Faces Selloff Pressure

A surprising choice for Japan's next prime minister has stirred up concerns about the Bank of Japan (BOJ) tightening its policies. This has caused markets to dip. Right now, bitcoin is feeling the pressure, especially since it was already in an overbought position.

Just about two weeks ago, the U.S. Federal Reserve cut rates by 50 basis points, and bitcoin shot up by around 14%. But now, the appointment of a new prime minister in Japan seems to have triggered a selloff.

The ruling party in Japan picked Shigeru Ishiba as the new prime minister. Many believe he supports the BOJ's plan to return to normal monetary policy, which means higher interest rates. After his selection, Ishiba called for snap elections later in October.

Remember, it was a small rate hike from the BOJ in late July that caused a major unwind in the yen carry trade. This led to a global market panic, driving bitcoin down from about $70,000 to below $50,000 in just a few days.

The situation got so intense that a former BOJ official had to step in and reassure the markets, saying they wouldn’t raise rates again in 2024.

However, Ishiba's appointment caused the yen to rise and Japan's Nikkei stock index to drop by 5%. This selling pressure quickly spread to bitcoin, which fell from around $66,000 to a low of $63,300. As of now, it has bounced back to about $63,800, which is still down about 3% since late Friday.

European stocks are down roughly 1% at midday, and U.S. stock index futures are showing only modest losses.

Before the weekend, bitcoin was enjoying a strong rally. This followed the Fed's recent rate cut. Plus, China launched new monetary and fiscal stimulus to boost its economy. The Shanghai Composite Index had its best week in over a decade, rising another 8% on Monday.

Last week, several indicators pointed to overbought conditions. CoinDesk analyst James Van Straten noted that perpetual funding rates for bitcoin futures had risen to levels similar to those seen before the selloffs in late July and August.

This week marks the start of a new month, bringing key economic reports and discussions from central banks. Later today, Fed Chair Jerome Powell may share insights on the economic and monetary policy outlook during a speech at the National Association for Business Economics annual meeting.

On Tuesday and Thursday, reports on U.S. manufacturing and service sectors from the Institute for Supply Management (ISM) will be released. The highlight will be the September jobs report on Friday.

This data could significantly influence the Fed's rate decision at its next meeting in early November, right after the presidential election. Currently, markets see about a two-in-three chance of a 25 basis point rate cut, according to CME FedWatch. The Fed's unexpected move to cut rates by 50 basis points in September sparked this recent bullish trend. A major shift in the odds for the November rate cut could again impact price movements.