Debunking The Yen Carry Trade Unwind Alarms

With the Bank of Japan (BOJ) expected to hike rates next week, some observers are worried that the Japanese yen could surge, triggering an unwinding of “carry trades,” crushing bitcoin.

Their analysis, however, overlooks actual positioning in the FX and bond markets, missing the nuance and far more likely risk that Japanese yields, by anchoring and potentially lifting global bond yields, could eventually weigh over risk assets rather than the yen itself.

Popular yen carry trades

Before diving deeper, let’s break down 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 pinned near zero, prompting traders to borrow in yen and invest in U.S. tech stocks and U.S. Treasury notes.

As Charles Schwab noted, “Going long on tech and short on the yen were two very popular trades, because for many years, the yen had been the cheapest major funding currency and tech was consistently profitable.”

With the BOJ expected to raise rates, concerns are rising that the yen will lose its cheap-funding status, making carry trades less attractive. Higher Japanese interest rates and JGB yields, along with a strengthening yen, could trigger carry trade unwinds – Japanese capital repatriating from overseas assets and sparking broad risk aversion, including in BTC, as witnessed in August 2025.

Debunking the scare

This analysis, however, lacks nuance on several levels.

First and foremost, Japanese rates – even after the expected hike – would sit at just 0.75%, versus 3.75% in the U.S. The yield differential would still remain wide enough to favor U.S. assets and discourage mass unwinding of carry trades. In other words, BOJ will remain the most dovish major central bank.

Secondly, the impending BOJ rate hike is hardly 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%, which is more than 100 basis points above the official Japanese benchmark interest rate of 0.75% projected after the hike.

This disconnect between bond yields and policy rates suggests market expectations for tighter monetary conditions are likely already priced in, reducing the shock value of the rate adjustment itself.

“Japan’s 1.7% JGB yield isn’t a surprise. It has been in forward markets for more than a year, and investors have already repositioned for BOJ normalization since 2023,” InvestingLive’s Chief Asia-Pacific Currency Analyst Eamonn Sheridan said in a recent explainer.

Bullish yen positioning

Lastly, speculators’ net long yen positions leave little room for panic buying post-rate hike—and even less reason for carry trade unwinds.

Data tracked by Investing.com shows that speculators’ net positioning has been consistently bullish on the yen since February this year.

This starkly contrasts with 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 unwinding of carry trades and losses in stocks and cryptocurrencies.

Another notable difference back then was that the 10-year yield was on the verge of breaking above 1% for the first time in decades, which likely triggered a shock adjustment. That’s no longer the case, as yields have been above 1% and rising for months, as discussed earlier.

The yen’s role as a risk-on/risk-off barometer has come under question recently, 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 it is unlikely to be anything like what was seen in August 2025. Investors have already positioned for tightening, as Schwab noted, and adjustments to BOJ tightening are likely to happen gradually and are already partially underway.

What could go wrong?

Other things being equal, the real risk lies in Japanese tightening sustaining elevated U.S. Treasury yields, countering the impact of expected Fed rate cuts.

This dynamic could dampen global risk appetite, as persistently high yields raise borrowing costs and weigh on asset valuations, including those of cryptocurrencies and equities.

Rather than a sudden yen surge unwinding carry trades, watch BOJ’s broader global market impact.

Another macro risk: President Trump’s push for global fiscal expansion, which could stoke debt fears, lift bond yields, and trigger risk aversion.