With the Bank of Japan (BOJ) expected to raise rates next week, some observers are worried that the Japanese yen could rise, leading to a dissolution of carry trades, crushing bitcoin.
However, their analysis overlooks actual positioning in the currency and bond markets, glossing over the nuances and the much more likely risk that Japanese yields, by anchoring and potentially lifting global bond yields, could eventually weigh on risk assets rather than the yen itself.
Popular yen carry trades
Before delving deeper, let’s look at the yen carry trade and its influence on global markets over the past few decades.
The yen (JPY) carry trade involves investors borrowing yen at low rates in Japan and investing in high-yielding assets. For decades, Japan kept interest rates near zero, prompting both traders to borrow in yen and invest in technology stocks and U.S. Treasury notes.
As Charles Schwab noted, “going long technology and short yen were two very popular trades, because for many years, the yen had been the cheapest major funding currency and technology was consistently profitable.”
With the Bank of Japan expected to raise rates, concerns are growing that the yen will lose its cheap funding status, making carry trades less attractive. Higher Japanese interest rates and JGB yields, coupled with a strengthening yen, could trigger carry trade returns: Japanese capital would be repatriated from overseas assets and trigger broad risk aversion, including in BTC, as seen in August 2025.
Denying the scare
However, this analysis lacks nuance on several levels.
First, Japanese rates – even after the expected increase – would be just 0.75%, versus 3.75% in the United States. The yield spread would still remain wide enough to favor US assets and discourage carry trade sell-offs. In other words, the BOJ will remain the most dovish major central bank.
Second, the BOJ’s impending rate hike is not unexpected and is already priced in, as evidenced by Japanese government bond (JGB) yields hovering near multi-decade highs. The benchmark 10-year JGB yield currently stands at 1.95%, more than 100 basis points above the Japanese official benchmark interest rate of 0.75% projected after the hike.
This disconnect between bond yields and policy rates suggests that market expectations of tighter monetary conditions are likely already priced in, reducing the shock value of the rate adjustment itself.
“Japan’s JGB’s 1.7% yield is not a surprise. It has been in forward markets for over a year, and investors have already repositioned for BOJ normalization from 2023,” InvestingLive’s Asia-Pacific chief currency analyst Eamonn Sheridan said in a recent explainer.
Bullish positioning of the yen
Finally, speculators’ net long yen positions leave little room for panic buying after the rate hike, and even less reason for the carry trade to unwind.
Data tracked by PakGazette shows that speculators’ net positioning has been consistently bullish against the yen since February of this year.
This is in stark contrast to mid-2024, when speculators were bearish on the yen. That likely triggered panic buying of the yen when the BOJ raised rates from 0.25% to 0.5% on July 31, 2024, leading to the cancellation of carry trades and losses in stocks and cryptocurrencies.
Another notable difference back then was that the 10-year yield was about to surpass 1% for the first time in decades, likely triggering a shock adjustment. That is no longer the case as yields have been above 1% and rising for months, as mentioned above.
The yen’s role as a barometer of risk and risk aversion has recently come into question, with the Swiss franc emerging as a rival offering relatively lower rates and reduced volatility.
To conclude, the expected BOJ rate hike could bring volatility, but is unlikely to be anything like what was seen in August 2025. Investors have already positioned themselves for a tightening, as Schwab noted, and adjustments to the BOJ’s tightening are likely to come gradually and are already partially underway.
What could go wrong?
All things being equal, the real risk is that the Japanese tightening will maintain high US Treasury yields, offsetting the impact of expected rate cuts from the Federal Reserve.
This dynamic could dampen global risk appetite as persistently high yields raise borrowing costs and weigh on asset valuations, including those of cryptocurrencies and stocks.
Instead of a sudden rise in the yen undoing carry trades, let’s look at the BOJ’s broader impact on the global market.
Another macro risk: President Trump’s push for fiscal expansion, which could stoke fears about debt, raise bond yields and trigger risk aversion.
