BCA Research has issued a warning that the yen carry trade has become a "ticking time bomb," with the popular hedge fund strategy facing significant risks of a mass unwinding. According to a Bloomberg report, an analyst team at BCA Research believes the yen carry trade could see a repeat of the crash scenarios witnessed in 2008, 2015, and 2020. During those periods, a sharp deterioration in global risk sentiment triggered sudden deleveraging, prompting investors to rush to buy yen as a safe-haven asset.

In their latest report, analysts including Arthur Budaghyan stated that the next unwinding event will likely be triggered by a decline in "carry trade assets" and/or a rebound in the yen's value, with both factors reinforcing each other and leading to a large-scale reversal of yen carry trade positions. The yen has appreciated over 1% against the U.S. dollar so far this year, currently trading near 154.4, a recovery from levels close to 160 last month. Markets are closely watching for a potential interest rate hike by the Bank of Japan later this year.

The mechanism and risks of the carry trade involve borrowing low-yielding yen to purchase higher-yielding assets, profiting from the interest rate differential. However, this strategy can quickly unravel under two conditions: a sharp drop in high-risk assets or a significant appreciation of the yen. The BCA Research team noted that while it is difficult to precisely estimate the scale of yen carry trades, multiple indicators suggest the strategy has "surged in recent years," involving a "substantial" amount of capital.

The firm highlighted that the yen carry trade previously collapsed during the 2008 financial crisis, as well as in 2015 and 2020. A common feature of these periods was a rapid deterioration in global risk sentiment, leading to concentrated investor deleveraging. BCA Research emphasized that it is impossible to predict whether the next unwinding will be triggered first by falling asset prices or a yen rebound, but "once the yen begins to appreciate, the magnitude of the rise could be substantial due to the surge in yen carry trades."

The yen is rebounding from historically weak levels and has moved away from zones that might have prompted intervention by the Bank of Japan. Market expectations of a potential rate hike by the Japanese central bank this year are becoming a key factor supporting the yen.