Bitcoin traders have a reason to watch Tuesday's BOJ rate decision. Yen shorts are at a nine-year high

Bitcoin BTC$65,783.19 traders typically obsess over Fed meetings. This week, the one that matters might be in Tokyo.

The Bank of Japan is widely expected to raise its benchmark interest rate to 1% from 0.75% on Tuesday, bringing it to its highest level since 1995. That may sound like a routine policy decision from a central bank on the other side of the world and a non-event for crypto markets.

It isn’t, and here is why. Leveraged funds increased their speculative short positioning in yen to over 115,000 contracts in the week ended June 9, the highest since November 2017, according to data tracked by the Commodity Futures Trading Commission. These are bets that the yen will continue to weaken, and there are a lot of them.

If the BOJ hikes rates as expected and signals further tightening ahead, these yen shorts may be unwound, triggering a rise in the yen. That would hurt yen-funded carry trades, in which investors borrow in yen to invest in higher-yielding, risk-on assets.

These carry trades have helped fuel bull markets on Wall Street and in government bond markets across the advanced world for years. Some analysts believe they have also supported crypto markets.

As a result, a sharp unwinding could destabilize markets broadly, including bitcoin.

The current setup is strikingly similar to the one preceding the BOJ’s rate hike in late July 2024. At that time, yen short positions were at record highs.

After the hike, the rapid unwinding of those shorts drove a sharp rally in the yen, sparking volatility across Wall Street, Japan’s Nikkei, and crypto. Bitcoin plunged from roughly $65,000 to $50,000 within a week of the July 31 decision.

Today’s setup rhymes with that sequence, so traders should closely watch the BOJ’s meeting on Tuesday. If the hike comes as expected and Governor Kazuo Ueda’s tone remains cautious, markets may shrug it off and stay relatively steady.

However, if Ueda signals a faster pace of tightening, or surprises with language suggesting rates could rise well beyond 1.0%, the yen could strengthen sharply, causing jitters across financial markets.

Crypto, historically one of the most sensitive assets to sudden liquidity shifts, would likely be among the hardest hit.