A large build-up of speculative yen shorts has increased the risk of a sharp squeeze if the Bank of Japan signals a more aggressive tightening path, potentially forcing an unwind of yen-funded carry trades that have supported risk assets globally.

Bitcoin traders usually pay close attention to Federal Reserve meetings, but this week the focus may shift to Tokyo.

The Bank of Japan is widely expected to raise its benchmark rate to 1% from 0.75% on Tuesday, which would be the highest level since 1995. While this may appear to be a routine policy move from a distant central bank, its implications for crypto markets could be more significant than the headline suggests.

Positioning is the key issue. Leveraged funds have built net short yen positions exceeding 115,000 contracts in the week ending June 9, the highest level since November 2017, according to Commodity Futures Trading Commission data. These crowded trades reflect strong bets on continued yen weakness.

If the BOJ delivers the expected hike and signals further tightening, those shorts could unwind quickly, driving the yen higher. A stronger yen would put pressure on carry trades that rely on borrowing in yen to finance exposure to higher-yielding risk assets.

For years, these carry trades have provided liquidity that has supported global markets, including equities, bonds, and increasingly crypto.

A rapid unwind could therefore transmit volatility across asset classes, with Bitcoin particularly exposed to sudden liquidity shifts.

A similar setup played out ahead of the BOJ’s July 2024 rate hike, when yen shorts were also stretched. After the decision, a fast unwind triggered a sharp yen rally and widespread volatility across global equities, Japan’s Nikkei index, and crypto markets. Bitcoin fell from around $65,000 to roughly $50,000 within a week.

The current conditions closely resemble that earlier episode, which is why traders are closely watching Tuesday’s meeting.

If the BOJ hikes as expected and Governor Kazuo Ueda maintains a cautious tone, markets may treat the move as largely priced in.

However, if the central bank signals faster tightening or suggests rates could rise meaningfully above 1%, it could trigger a stronger yen rally and renewed pressure across risk assets.

Given its sensitivity to liquidity conditions, Bitcoin is likely to be among the first markets to react.