Author: Tehsin Amlani, Messari Research Analyst; Translated by: 0xjs@Golden Finance
A broad market sell-off has swept across the globe, with U.S. indices down 3% and cryptocurrency market capitalization down 11% in the past 48 hours.
One factor contributing to the global market contraction was the Bank of Japan (BoJ) rate hikes and their impact on a popular investment strategy called the carry trade, where investors borrow a low-interest currency, such as the yen, and then reinvest the borrowed money in a higher-interest currency, such as the dollar.
For many years, investors have borrowed yen at low interest rates (e.g., about 0.4%) and used the borrowed yen as leverage. They exchanged the yen for dollars (or other strong, high-yielding currencies) and received almost free margin. This arbitrage was possible because there was a large gap between the low borrowing rates for yen and the high interest rates for dollars.
However, since the Bank of Japan raised interest rates from 0-0.1% to ≈0.25% last week, effectively ending the negative interest rate policy, the attractiveness of the yen carry trade has decreased significantly, leading many investors to liquidate their positions.
The USD/JPY pair just hit its lowest level since 2023 as the yen strengthens against the U.S. dollar as investors repay borrowed yen.
As the yen strengthens, more yen carry trades will be subject to margin calls and the underlying assets will be sold off, hitting global markets hard.
The era of free yen loans is coming to an end.
What does this mean for the cryptocurrency market? Cryptocurrencies remain riskier than U.S. stocks, so declines in traditional markets typically lead to larger declines in the cryptocurrency market.
Given recent high unemployment, stubborn inflation, geopolitical uncertainty, and the aftermath of the impending unwinding of the yen carry trade, we may be in for some impending turbulence.
