BOJ Rate Hike Expected Amidst Yen Carry-Trade Concerns and Market Risks
The Bank of Japan (BOJ) is expected to hike rates next week, potentially raising the policy rate to 0.75% with the 10-year Japanese Government Bond (JGB) yield around 1.95%. Despite this, speculators have held net bullish yen positions since February, making a rapid yen carry-trade unwind less likely. The wide yield differential between the US (~3.75%) and Japan (~0.75%) continues to support US assets and discourages large-scale carry-trade unwinds. The upcoming rate hike is largely priced into the market, with yields near multi-decade highs, suggesting that any shock from the BOJ tightening may be limited and gradual in nature. However, carry-trade unwinds, such as those seen in August 2025 that resulted in losses in stocks and cryptocurrencies, illustrate possible risk scenarios. The yen's traditional role as a risk barometer is now questioned, with the Swiss franc emerging as a rival. A key macroeconomic risk is that sustained higher Japanese tightening could keep US yields elevated, potentially dampening global risk appetite and putting downward pressure on crypto assets. Additionally, fiscal expansion policies in the US, such as those proposed by former President Trump, could further elevate yields and increase risk aversion.
