🇯🇵 BOJ Decision Day: The Yen Carry Trade Cheat Sheet

Japan’s rate decision puts the world’s liquidity engine under pressure

Tonight’s Bank of Japan decision is not about a 25‑basis‑point tweak – it’s about whether Tokyo is ready to declare the global “cheap money” era officially over. After lifting rates to 0.75% in December – the highest policy rate in three decades – the BOJ is widely expected to pause tonight. But that “pause” sits on top of a ¥21.3 trillion (~$135.5bn) fiscal package rammed through in November and a debt load near 236.7% of GDP, the worst in the developed world. The result is an unstable equilibrium: fiscal policy is flooring the accelerator while monetary policy is gently tapping the brakes. That mix has already driven JGB yields to multi‑year highs and kept the yen pinned weak, forcing markets to price a slower but still grinding path higher for Japanese rates and raising the risk that every future hike detonates a larger interest bill on an already over‑levered sovereign.

This is where it collides directly with your portfolio. The last time the BOJ surprised markets – in early August 2024 – the yen carry unwind did not stay in Japan. As the yen ripped higher and funding costs jumped, Tokyo’s TOPIX collapsed roughly 20% over three days and the Nikkei 225 dropped about 12–13% in a single session – its worst day since 1987. The shock then rolled straight into global risk: the S&P 500 fell around 3% on the day and more than 5% over three sessions, its sharpest three‑day slide in over two years, while Bitcoin plunged from about $58,000 to near $50,000 in hours – a 14–15% intraday crash – and the Bloomberg Galaxy Crypto Index sank as much as 17.5%. Crypto futures saw over $1 billion in forced liquidations, including roughly $460 million in Bitcoin alone, and aggregate open interest was wiped down by about 30% in a week as over‑levered carry and basis trades were steamrolled. That episode was driven by the same mechanism in play tonight: a sudden repricing of yen funding.

Despite that the yen remains a core funding engine. Estimates of the yen‑funded carry complex still range from the high hundreds of billions up toward the low single‑digit trillions of dollars once you include FX swaps, structured products, and cross‑asset leverage. Take the middle of that range – say around $2 trillion – and even a 20% de‑risking implies roughly $400 billion of potential selling pressure bleeding into US equities, EM assets, credit, and crypto. Today, the S&P 500 is back near all‑time highs, the VIX is dozing around 17, and Bitcoin is trading just below $90k – classic late‑cycle, carry‑friendly conditions. If Governor Ueda leans hawkish, pulling the expected next hike forward toward April or hammering home the inflation risk from a weak yen and loose fiscal policy, the global funding valve tightens again: the cost of yen leverage rises, the economics of crowded carry trades flip, and the scramble for the exits can turn into another forced‑selling cascade. In a world still priced for “soft landing and easy liquidity,” that exit door is getting very small, very fast.