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