As speculation builds around the Bank of Japan’s (BOJ) anticipated rate hike next week, concerns are rising among investors about potential repercussions for the Japanese yen and risk assets, including cryptocurrencies. Some analysts warn that a strengthening yen could lead to the unwinding of popular “carry trades,” which have underpinned significant investments in high-yield assets globally. However, this perspective may oversimplify the complex dynamics at play in the forex and bond markets.
The yen carry trade has been a cornerstone of investment strategies for decades. It involves leveraging low borrowing costs in Japan’s near-zero interest rate environment to invest in higher-yielding assets elsewhere, notably U.S. technology stocks and treasury notes. As noted by investment firm Charles Schwab, this trade gained popularity due to the yen being one of the most favorable funding currencies, allowing investors to maximize returns while minimizing costs.
The BOJ’s expected interest rate hike could ostensibly position the yen to lose its attractiveness as a funding currency, prompting investors to withdraw capital from foreign investments and thus boosting risk aversion across markets, including Bitcoin. In August 2025, for example, a shake-up in carry trades severely impacted asset valuations.
However, critics of this scenario highlight that the nuance of the situation is often neglected. Even with the anticipated hike to 0.75%, Japanese rates would still fall significantly below U.S. rates, currently at 3.75%. This ongoing yield differential might still favor U.S. assets, discouraging a mass exit from carry trades. Furthermore, the BOJ’s position is likely to remain the most dovish among major central banks, acting as a stabilizing factor for investors.
Moreover, the impending increase in rates isn’t a surprise to investors, as it appears to already be absorbed in current market valuations. Japanese government bond (JGB) yields have climbed to multi-decade highs, indicating that the market has anticipated tighter monetary conditions for some time. The benchmark 10-year yield recently stood at 1.95%, well above the newly projected policy rate, implying that much of the potential adjustment has already been factored in.
Bullish positioning in the yen also plays a significant role. Investors’ net long positions in the yen have been favorable since February, contrasting sharply with the bearish sentiment observed in mid-2024, which had previously driven panic buying following BOJ rate adjustments. The market’s readiness this time around, together with the stability in yields exceeding 1%, suggests a more measured response to the upcoming rate change.
Additionally, the yen’s traditional function as a risk-on/risk-off barometer has come under scrutiny, with the Swiss franc emerging as a competitor that offers lower rates and reduced volatility.
While the anticipated BOJ rate hike may instigate some market fluctuations, analysts stress that the degree of commotion is likely to be muted compared to previous volatility experienced in August 2025. Adjustments to BOJ policies appear to be unfolding gradually, already reflecting changing perspectives in market positioning.
However, a notable risk does remain. A tightening of Japanese monetary policy could sustain high U.S. Treasury yields, counteracting expected Federal Reserve rate cuts. This dynamic could dampen global risk appetite, leading to increased borrowing costs and decreased asset valuations across the board, including cryptocurrencies and equities. Meanwhile, macroeconomic pressures, such as potential fiscal expansion initiatives, could further complicate this landscape, elevating bond yields and fostering risk aversion in the broader market.
Investors are thus advised to keep a close eye on the BOJ’s broader global impact rather than solely focusing on the yen’s immediate response to the expected rate hike.
