Reminder: Bank of Japan Expected to Hike Rates 25 bps Friday

Higher Japanese rates = stronger yen

This policy shift could trigger a chain reaction rippling through global financial markets.

Transmission Mechanism

The unwinding of the yen carry trade is the core risk. For years, investors have borrowed low-interest yen to invest in higher-yielding overseas assets. As Japanese rates rise, this strategy becomes less attractive, prompting investors to unwind their positions.

During the unwinding process, investors sell foreign assets to repay yen-denominated loans. U.S. Treasuries, as one of the primary investment targets, may face selling pressure. Capital outflows from the Treasury market would push U.S. yields higher.

The end result is tighter global liquidity. This puts pressure on risk assets, including equities and cryptocurrencies.

Market Impact

The yen carry trade is enormous in scale, and its unwinding triggered severe global market turbulence in August 2024. At that time, the Nikkei plunged over 12% in a single day, marking a historic decline, while global equity and crypto markets experienced sharp synchronized pullbacks.

If the Bank of Japan raises rates as expected this time, market participants should closely monitor yen exchange rate movements and U.S. Treasury yield changes to assess the scale and speed of carry trade unwinding.

Key Indicators to Watch

The USD/JPY exchange rate, the U.S. 10-year Treasury yield, and correlated movements in global risk assets will serve as critical signals for gauging market stress.