These carry trades have helped fuel bull markets on Wall Street and in government bond markets in advanced countries for years. Some analysts believe they have also supported crypto markets.
As a result, a sudden decline could destabilize all markets, including Bitcoin.
The current pattern is strikingly similar to the one leading up to the BoJ’s rate hike in late July 2024. At that time, yen short positions were at record levels.
After the rise, the rapid unwinding of these shorts led to a sharp rise in the yen, causing volatility on Wall Street, Japan’s Nikkei and cryptocurrencies. Bitcoin plunged from around $65,000 to $50,000 in the week following the July 31 decision.
Today’s pattern matches this sequence, so traders should closely monitor Tuesday’s BOJ meeting. If the rally plays out as expected and Governor Kazuo Ueda’s tone remains cautious, markets could ignore it and remain relatively stable.
However, if Ueda signals a faster pace of tightening or surprises by suggesting rates could rise well beyond 1.0%, the yen could strengthen sharply, causing some nervousness in financial markets.
Cryptocurrencies, historically one of the assets most sensitive to sudden changes in liquidity, would likely be among the hardest hit.
