These carry trades have helped fuel bull markets on Wall Street and in government bond markets across the advanced world for years. Some analysts believe they have also supported crypto markets.
As a result, a sharp unwinding could destabilize markets broadly, including bitcoin.
The current setup is strikingly similar to the one preceding the BOJ’s rate hike in late July 2024. At that time, yen short positions were at record highs.
After the hike, the rapid unwinding of those shorts drove a sharp rally in the yen, sparking volatility across Wall Street, Japan’s Nikkei, and crypto. Bitcoin plunged from roughly $65,000 to $50,000 within a week of the July 31 decision.
Today’s setup rhymes with that sequence, so traders should closely watch the BOJ’s meeting on Tuesday. If the hike comes as expected and Governor Kazuo Ueda’s tone remains cautious, markets may shrug it off and stay relatively steady.
However, if Ueda signals a faster pace of tightening, or surprises with language suggesting rates could rise well beyond 1.0%, the yen could strengthen sharply, causing jitters across financial markets.
Crypto, historically one of the most sensitive assets to sudden liquidity shifts, would likely be among the hardest hit.