The Japanese yen has weakened significantly, trading above ¥153 per US dollar for the first time since February. This has raised concerns about the yen carry trade and the potential for a global financial crisis.
The Bank of Japan faces a crucial choice: raise interest rates to support the plummeting yen, or maintain current policy and risk market turmoil. Experts warn that the fallout from the policy change could trigger a crisis.
Tipping Point for Yen Carry Trading
A yen carry trade involves borrowing low-interest yen and investing it in higher-yielding assets abroad, such as US stocks or bonds, to take advantage of the interest rate differential. For decades, Japan's near-zero interest rates have made the yen an attractive funding currency.
Notably, even small adjustments by the Bank of Japan have caused ripples in the market. For example, in July 2024, the BoJ's first rate hike in years pushed the yen up 13% in just one month.
However, the move set the stage for chaos in August, when Japanese stocks suffered record losses. According to Reuters , the Nikkei index recorded its biggest one-day drop since Black Monday in 1987.
“After the Bank of Japan raised interest rates by a quarter point in early 2024, they surprised the market with a second hike shortly thereafter. That triggered a sharp rally in the yen, pushed the VIX above 60 and caused a roughly 10% correction in the S&P 500,” said analyst Michael A. Gayed.
This volatility occurs because carry trades are often highly leveraged. A sudden increase in the value of the yen or a change in interest rate differentials can trigger panic selling. The forced selling then pushes prices lower across the markets.
However, today's yen carry trade is much larger, with estimates reaching as high as $14 trillion—more than three times the cryptocurrency market Capital . This adds to the risk as the yen continues to fall.
Analysts call this scenario a potential 'Black Swan' event —a rare, unpredictable event with global consequences. If the gap between Japanese and foreign interest rates narrows further, a rapid sell-off could amplify the panic, affecting bonds, stocks, and cryptocurrencies .
Policy deadlock and political uncertainty
Meanwhile, the BoJ is facing a difficult situation under Governor Kazuo Ueda. Raising interest rates could stabilize the yen but risks collapsing the Japanese bond market and spilling over to US stocks, given the interconnected nature of global finance.
Maintaining low interest rates, however, invites currency collapse and hyperinflation . Political changes have added to the uncertainty.
Investors have reassessed the outlook for monetary policy after Sanae Takaichi won the LDP leadership race. With her strong opposition to rate hikes, the likelihood of an October rate hike has dropped sharply from 68% to 25%.
However, BoJ Governor Kazuo Ueda's responsibilities are growing. He must balance political pressure with maintaining the central bank's independence.
Recent indicators highlight growing risks. The Yen Carry Trade Index has shown bearish divergence, signaling a possible reversal. Moreover, macroeconomist Kashyap Sriram has suggested that without intervention, the yen could become the first major currency to collapse in modern times.
This could therefore prompt the BoJ to raise interest rates to shore up the falling yen despite political pressure.
Ripple effects on cryptocurrencies and global assets
Meanwhile, the consequences of rising interest rates don’t just affect stocks and bonds—cryptocurrencies are at risk, too. In the chaos of August 2024, Bitcoin (BTC) fell below $50,000.
“If a rate hike happens, investors will sell their global assets and convert them into yen to repay debt. This will bring a lot of short-term selling pressure, similar to August 2024,” said analyst Ted Pillows.
So if the BoJ decides to raise interest rates again, Bitcoin could be affected in the coming months. While Q4 is typically good for BTC performance, the macroeconomic shock from the yen-induced liquidation crisis could still overwhelm those trends.
As a result, the fate of global assets—from stocks to Bitcoin—now depends on Japan’s next move. Investors are bracing for potential aftershocks, as future yen policies have major implications for anyone involved in global Capital markets.
