As of 2025, the Bank of Japan’s (BOJ) balance sheet is massive, equivalent to 125% of Japan’s GDP. That makes it the largest relative size of any major central bank.
Given that the bank’s holdings primarily include Japanese government bonds, it is also vulnerable to rising interest rates. This, combined with increasing inflation expectations, raises the potential for a simultaneous decline in Japanese government bond prices and the Japanese yen.
The BOJ carry trade refers to a strategy where investors borrow money in Japanese yen, which typically has very low interest rates, and then invest that money in higher-yielding assets in other currencies. This can be very profitable as long as the interest rate differential remains favorable.
However, recent actions by the Bank of Japan (BOJ), such as raising interest rates, have caused significant volatility in the markets. When the BOJ increases rates, the yen strengthens, making it more expensive to repay yen-denominated loans. This can lead to a rush to unwind these trades, causing market disruptions.
#EyeonVolatility
