This Wall Street investment bank warns: Yen carry trades are a "time bomb"

BCA Research warns that yen carry trades have become a "time bomb," and this strategy, popular among hedge funds, faces the risk of large-scale unwinding. On February 11, according to Bloomberg, BCA Research’s analyst team believes that yen carry trades may repeat the 2008, 2015, and 2020 crash scenarios. At those times, worsening global risk sentiment triggered sudden deleveraging as investors rushed to buy yen as a safe haven. In the latest report from Arthur Budaghyan and other analysts at the investment bank, they pointed out that the next unwinding will be triggered by the decline in "carry assets" and/or a rebound in the yen, with both factors reinforcing each other, causing a large-scale reversal of yen carry trades. The yen has risen more than 1% against the US dollar so far this year and is currently trading near 154.4—up from last month's level near 160. The market is closely watching possible interest rate hikes by the Bank of Japan later this year. Carry Trade Mechanism and Risks The basic strategy of yen carry trades is to borrow low-yielding yen to buy high-yield assets, thereby earning a yield differential. However, this strategy can quickly unravel in two scenarios: a collapse in high-risk asset prices or a sharp appreciation of the yen. The BCA Research analyst team stated that, although it is difficult to precisely estimate the scale of yen carry trades, several indicators suggest that this trade has "surged in recent years," involving "substantial" amounts. The firm pointed out that yen carry trades previously crashed during the 2008 financial crisis, and again in 2015 and 2020. The common feature of these periods was a severe deterioration in global risk sentiment, leading investors to collectively deleverage. BCA Research emphasized that it is "impossible to predict whether the next unwinding will be triggered first by asset declines or a yen rebound, but once the yen starts to appreciate, due to the surge in carry trades, the magnitude of appreciation will be considerable." The yen is rebounding from historically weak levels and has moved away from a range that might trigger Bank of Japan intervention. Expectations of possible rate hikes by the Bank of Japan this year are becoming a key factor supporting the yen. Risk Warning and Disclaimer The market contains risks, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are appropriate for their own circumstances. Invest accordingly at your own risk.