Yen carry trade unwind hits crypto after rare US-Japan intervention

The yen had been a favorite funding currency for carry trades, where investors borrow at low Japanese rates and park the proceeds in higher-yielding assets, including crypto. The rate gap between the US and Japan widened the appeal. When the intervention pushed the yen higher, those trades turned unprofitable. Borrowers rushed to buy back yen, squeezing leveraged positions and amplifying the move.

Traders pointed to a smaller yen carry trade unwind in July and August 2024 that contributed to a sharp Bitcoin selloff. This time, with the yen at four-decade lows, carry trade positions had accumulated over a longer period, making the unwind more violent.

The $36.58 billion Japan spent is substantial but finite. Without a shift in Bank of Japan policy, the intervention may buy time rather than reverse the trend, as seen in 2022 and 2024 when Japan conducted unilateral interventions that slowed but did not stop the yen's decline. The US participation changes the calculus, signaling that Washington views yen weakness as a systemic risk, traders said.

The BOJ's September policy meeting is the next catalyst. Any rate increase would further unwind carry trades, adding pressure on crypto, traders said.