Speculative traders have pushed short positions against the Japanese yen to their highest level in nine years, signaling a broad revival of the yen carry trade — a strategy that involves borrowing cheap yen to buy higher-yielding assets elsewhere. The Bank of Japan is set to announce its rate decision on Tuesday, with markets currently pricing in a 25 basis point hike at the June meeting. The gap between what traders are betting and what the BOJ may actually do is as wide as it has been in nearly a decade.
A crowded yen carry trade is a systemic risk hiding in plain sight — when it unwinds, it tends to unwind fast, hitting risk assets globally including equities, crypto, and high-yield bonds simultaneously. If the BOJ surprises with a hike sooner than expected, the rush to close yen shorts could spike the yen sharply and trigger forced selling across asset classes. Investors with exposure to Japanese equities or global risk assets should be aware that the carry trade at nine-year extremes is a compressed spring.
Tuesday (this week): Bank of Japan rate decision. June meeting: BOJ rate decision where a 25 basis point hike is currently priced in.
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