‘The Clearest Macro Risk to Bitcoin’: Why Bitfinex Is Warning Investors About the Yen Carry Trade

Yen Carry Trade Reversal Awakens Fears in Bitcoin Analysts

One of the most relevant global liquidity drivers, the Japanese carry trade, is under analyst scrutiny again due to the recent devaluation of the yen, which might prompt a reversal of the conditions that gave it its origin.

As explained in Bitcoin News before, the yen carry trade has its origin in the historically low cost of borrowing money in Japan. Investors leverage this liquidity, extracting it from the country and funneling it into more lucrative markets, investing in risk assets such as tech stocks and bitcoin.

The recent devaluation of the Japanese yen, which has touched historic lows, has experts examining possible actions by the Bank of Japan, which might choose to tighten its fiscal policy, affecting the carry trade and the assets that benefit from it.

Bitfinex analysts have flagged the yen carry trade as the “clearest macro risk to bitcoin right now.”

“JP10Y hit new highs while the yen sits near 162, and a sharp yen reversal from here would tighten liquidity and pressure $BTC and $ETH. A real risk to a market still trying to find a floor,” the stressed, underscoring the risks of a potential policy change for risk assets.

Nonetheless, some claim these fears are unfounded, as the market believes Japan cannot take aggressive action due to its massive debt. “As a result, the wide US-Japan interest rate differential – and the structural weakness of the yen – are likely to persist,” said Bosco Wu, an investment strategist at Bank of East Asia.

The central bank predicted that the yen would weaken even further, reaching 165 per dollar in 12 months. It has already directed interventions to preserve the yen’s value, injecting about $73 billion into foreign exchange interventions from April to May.

These have been limited in scope, having little effect on a forex market that moves close to 17% of all global trade volume – over $1.6 trillion daily.

Even so, shifting expectations might affect the market, even if a reversal does not happen in the end.

Cliff Zhao, chief economist at CCB International, and global strategist Vera Jiang told SCMP that “if expectations for both US and Japanese monetary policy were to shift simultaneously, a stronger yen, risk-asset sell-offs and leveraged position unwinding could quickly reinforce one another, amplifying volatility across global markets through highly liquid assets.”

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