As the Bank of Japan's (BOJ) interest rate decision approaches, market caution regarding a potential 'Yen Carry Trade Unwind' is resurfacing. Analysts suggest that if an interest rate hike—which could strengthen the yen—becomes a reality, it may lead to a broader contraction of liquidity in global asset markets.

The mechanism by which carry trade liquidations affect risk assets is relatively clear. Capital that was borrowed in low-interest yen to invest in global high-risk, high-return assets must be sold off as investors repay debts due to the rising value of the yen and the narrowing interest rate differential. In this process, highly liquid, 24/7 traded assets like Bitcoin (BTC) tend to face selling pressure first.

Indeed, the market vividly remembers the concurrent crash of global stock markets and Bitcoin that occurred between late July and early August 2024, triggered by the yen carry trade unwinding. At that time, Bitcoin saw a sharp decline in just a few days, demonstrating its vulnerability to macro liquidity shocks.

While the market has experienced a temporary relief rally due to easing geopolitical risks—such as reports of a U.S.-Iran peace agreement—the major macro axis of the BOJ's monetary policy shift remains an unresolved tail risk. Because the short-term market direction could be heavily influenced by the scale of the rate hike and the BOJ's hawkish stance, it is essential to closely monitor yen exchange rate volatility and global liquidity indicators for the time being.