The yen carry trade has become a “ticking time bomb” for hedge funds and other leveraged investors, with the potential for a sharp and disorderly unwind, according to a report by Bloomberg citing a note from BCA Research.

Analysts at BCA have warned that the widely used strategy – borrowing in Japan’s low-yielding currency to invest in higher-return assets elsewhere – could unravel rapidly if global risk assets weaken or the yen begins to strengthen. Such dynamics have previously triggered abrupt reversals in 2008, 2015 and 2020, when investors rushed to cover short yen positions amid deteriorating market sentiment.

The research team, led by Arthur Budaghyan, said a renewed appreciation of the yen could reinforce losses in carry trades, accelerating deleveraging across hedge fund portfolios. The yen has already gained more than 1% against the US dollar so far this year, rebounding from multi-decade lows as investors price in the possibility of Bank of Japan rate hikes later in 2026.

BCA said it was difficult to quantify the size of current yen carry positions, but noted that multiple indicators point to a significant build-up in recent years. As a result, any sustained move higher in the yen could trigger a “sizeable” market reaction.

The firm recommends that medium- and long-term investors position for further yen strength against the dollar, warning that a disorderly unwind of the carry trade could have broader implications for global risk markets.