The anticipated interest rate hike by the Bank of Japan (BOJ) next week has reignited worries about a possible collapse of the “carry trade” in both the cryptocurrency and global markets. However, experts argue that these concerns are not substantiated by current market data. The fundamental risk seems to be that Japan’s interest rate increase may keep global bond yields high, thereby weakening risk appetite in the long run.
Yen Carry Trade: A Historical Perspective
The yen carry trade has traditionally involved borrowing in low-interest yen to invest in higher-yielding assets. Japan’s longstanding near-zero interest rate policy has made this strategy attractive to global investors. According to an analysis by Charles Schwab, taking long positions in tech stocks while selling yen has been a popular method of gaining profits for decades. However, the potential interest rate hike could strip Japan of its cheap financing advantage, bringing scenarios of escaping from risky assets into play.
Following the expected rate hike, Japan’s policy rate is predicted to rise to 0.75%, while U.S. rates are anticipated to remain at 3.75%. This difference indicates that the yen might still be a weak financing tool. With ten-year Japanese government bond yields reaching 1.95%, the market has already priced in the tightening. InvestingLive analyst Eamonn Sheridan notes that investors have been preparing for the BOJ’s normalization since 2023, reducing the chances of a sudden market shock.
The Real Threat: Global Interest Rate Pressure
Speculators’ net long positions on the yen are currently preventing any panic buying. According to Investing.com, investors have been positioning for a yen rise since February. The crash following last year’s July interest rate increase was due to weak positioning at that time. This time, however, the situation is different. Markets have been preparing for BOJ tightening months in advance.
Despite this readiness, Japan’s monetary policy tightening could resonate across global bond markets. The rise in Japanese yields might limit the easing of U.S. bond rates, keeping global interest rates high. Such a scenario could pressure Bitcoin and other risky assets over the long term. Furthermore, Donald Trump’s global fiscal expansion plans could escalate debt concerns, pushing interest rates even higher. Therefore, the markets are shifting their focus from the yen’s strength to how high interest rates could remain.