Yen volatility threatens a repeat of the Bitcoin carry trade rout

While the weakened yen currently makes borrowing in Japan an attractive strategy for funding high-yield overseas positions, the underlying stability of this trade is fraying. Traders have scaled back expectations for an October rate hike following the Bank of Japan’s latest summary of opinions, yet the prospect of future tightening remains baked into the policy outlook. With Japanese 10-year government bond yields hovering at levels not seen since 1996, the environment that once provided cheap capital is undergoing a fundamental shift.

The real danger lies in a disorderly exit. During the August 2024 market turbulence, Bitcoin and other crypto assets suffered as investors liquidated liquid holdings to cover yen-denominated liabilities and margin calls. A similar mechanism could trigger fresh volatility if Japanese authorities decide to intervene in the currency market to arrest the yen's slide. Atsushi Mimura, Japan’s top currency diplomat, has signaled that Tokyo remains prepared to act, leaving leveraged investors vulnerable to a rapid currency spike that would necessitate an immediate, forced sale of global risk assets.