As the Bank of Japan (BOJ) is poised to increase rates next week, there are concerns among analysts about a potential surge in the Japanese yen, which could lead to a reversal of “carry trades” and negatively impact bitcoin.
However, this perspective misses the actual dynamics within the foreign exchange and bond markets. It overlooks the more nuanced and probable outcome where Japanese yields, by stabilizing and potentially elevating global bond yields, could impose downward pressure on risk assets rather than the yen itself.
Common yen carry trades
Before we delve deeper, let’s explore what the yen carry trade is and its implications for global markets over the years.
The yen (JPY) carry trade involves investors borrowing yen at low interest rates in Japan and channeling those funds into higher-yielding assets. For many years, Japan maintained interest rates near zero, encouraging traders to borrow yen and invest in U.S. tech stocks and U.S. Treasury notes.
As Charles Schwab observed, “Positioning for long tech and short yen has been highly favored, as the yen served as the most affordable major funding currency, while tech consistently reaped profits.”
With the BOJ’s anticipated rate hike, worries are mounting that the yen may lose its status as a cheap currency for funding, potentially diminishing the attractiveness of carry trades. Rising Japanese interest rates and JGB yields, coupled with a strengthening yen, could lead to unwinding carry trades, repatriating Japanese capital from foreign assets and inducing widespread risk aversion, including for BTC, similar to what occurred in August 2025.
Dispelling the fear
This analysis, however, lacks depth on various levels.
Primarily, even after the prospective hike, Japanese rates would remain at just 0.75%, in contrast to 3.75% in the U.S. The significant yield differential is likely to continue favoring U.S. assets, discouraging widespread unwinding of carry trades. Essentially, the BOJ will still be the most dovish major central bank.
Additionally, the upcoming BOJ rate hike is largely anticipated and appears to be priced into the market, as reflected by Japanese government bond (JGB) yields, which are approaching multi-decade highs. The current benchmark 10-year JGB yield sits at 1.95%, over 100 basis points higher than the projected post-hike Japanese benchmark rate of 0.75%.
This discrepancy between bond yields and policy rates signals that market expectations for tighter monetary conditions are likely already integrated, thus reducing the impact of the rate adjustment itself.
“Japan’s 1.7% JGB yield has been anticipated. It has been reflected in forward markets for well over a year, and investors have already adjusted their positions for BOJ normalization since 2023,” stated Eamonn Sheridan, Chief Asia-Pacific Currency Analyst at InvestingLive.
Favorable yen positioning
Moreover, the net long positions on the yen by speculators leave minimal room for panic buying after the rate hike, and even less justification for unwinding carry trades.
Data from Investing.com indicates that speculators have maintained a bullish stance on the yen since February this year.
This situation is starkly different from mid-2024 when speculators were bearish on the yen, potentially triggering panic buying when the BOJ hiked rates from 0.25% to 0.5% on July 31, 2024, which led to unwinding carry trades and financial losses across stocks and cryptocurrencies.
Another key difference back then was that the 10-year yield was poised to exceed 1% for the first time in decades, likely causing a shock adjustment. That is no longer the case, as yields have consistently remained above 1% and have been rising for months.
The yen’s function as a risk-on/risk-off indicator has recently been called into question, with the Swiss franc becoming a contender, offering relatively lower rates and diminished volatility.
In summary, while the anticipated BOJ rate hike may introduce volatility, it is unlikely to replicate the turmoil seen in August 2025. Investors have positioned themselves for tightening, as noted by Schwab, and modifications related to BOJ tightening are expected to unfold gradually, with some already in motion.
What are the potential pitfalls?
Under otherwise equal conditions, the true risk lies in Japanese tightening maintaining high U.S. Treasury yields, counteracting the influence of anticipated Fed rate cuts.
This scenario could dampen global risk appetite as persistently elevated yields increase borrowing costs and negatively impact asset valuations, including those of cryptocurrencies and equities.
Instead of a swift yen surge causing carry trade unwinds, focus on the BOJ’s broader implications for global markets.
Another macroeconomic concern arises from President Trump’s push for fiscal expansion, which could escalate debt apprehensions, boost bond yields, and induce risk aversion.
