BOJ Policy Pivot — JPY Carry Unwind Risk
The Japanese yen is the world's primary funding currency for carry trades — investors borrow JPY at near-zero rates and invest in higher-yielding assets globally.
When BOJ maintained Yield Curve Control (YCC) with policy rates at -0.1%, an estimated $4T+ in JPY-funded carry positions existed globally across currencies, bonds, and equities.
The carry unwind mechanism is asymmetric:
Positions build slowly over years and unwind explosively in days.
When BOJ tightens (raises rates or removes YCC caps), the JPY strengthens immediately, creating mark-to-market losses on the funding leg of carry trades.
This forces simultaneous position closures across assets as investors rush to repay JPY loans.
The August 2024 BOJ hike to 0.25% triggered USD/JPY to fall from 160 to 142 (10.5%) in 3 weeks and caused ~$2T in global equity sell-offs.
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