Yen Carry Trade Hangs by a Thread as BOJ Rate Hike Uncertainty Lingers

The Japanese yen has fallen to a new low against the US dollar, dropping below 158 per dollar after traders reduced their expectations for another Bank of Japan rate hike this month. This decrease in the yen's value keeps the 'yen carry trade' alive, but also increases the risk of another sudden reversal that could impact Bitcoin and the crypto market.

The BOJ's September meeting summary showed mixed opinions on whether to raise rates again, with several members wanting borrowing costs moved higher, while others pointed to weak consumption and slower services inflation as reasons to proceed carefully. Takuya Kanda, senior FX analyst at Gaitame.com Research Institute, said the opinions were hawkish but not enough to strengthen expectations for consecutive rate hikes.

A sudden rise in the yen could put pressure on carry trades, making it more expensive for investors to repay their liabilities and potentially forcing leveraged investors to close positions. This can feed into a self-reinforcing cycle as yen buying pushes the currency higher and puts more pressure on remaining carry trades. The Bank for International Settlements estimated that around ¥40 trillion ($250 billion) of carry trade exposure existed heading into the August 2024 selloff, which was amplified by leveraged trades across equity and currency markets.