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 decline could destabilize broader markets, including bitcoin.
The current setup is strikingly similar to the one that preceded the BOJ rate hike in late July 2024. At that time, yen short positions were at all-time highs.
After the rally, the rapid liquidation of those shorts fueled a strong rally in the yen, causing volatility on Wall Street, the Japanese Nikkei and cryptocurrencies. Bitcoin fell from about $65,000 to $50,000 a week after the July 31 decision.
Today’s setup rhymes with that sequence, so traders should watch Tuesday’s BOJ meeting closely. If the rise comes 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 with language suggesting rates could rise well beyond 1.0%, the yen could strengthen markedly, causing jitters in financial markets.
Cryptocurrencies, historically one of the assets most sensitive to sudden changes in liquidity, would likely be among the hardest hit.
