Yen's 40-Year Low Tests BOJ; Crypto Carry Trade at Risk

The Japanese yen touched 162.83 per dollar in early July, its weakest level since 1985. The Bank of Japan raised its benchmark rate to 1%, the highest since 1995. The yen kept falling. The government spent 11.7 trillion yen, about $73.5 billion, on direct intervention from April to May. The yen did not strengthen.

The currency's persistent weakness has fueled the yen carry trade. Investors borrow yen at low interest rates and convert the proceeds into dollars or other currencies. They park that capital in higher-yielding assets. Some traders said that channel has increasingly funded leveraged positions in Bitcoin and other crypto assets. A few funds have used yen-denominated loans to increase their digital asset exposure, according to traders.

A sudden reversal of the yen would force traders to unwind those positions, traders said. They would sell risk assets, including crypto, to repay yen loans. That could trigger a sharp sell-off, they added. Some traders have been buying options on USD/JPY to hedge against a sudden spike in the yen, they said.

The BOJ's next policy meeting is scheduled for July 31. A sustained rate hike cycle or direct intervention that stops the yen's slide would reduce the risk of a disorderly unwind, traders said. If the yen continues to weaken, the carry trade could expand, they added.