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as the yen continues to rise and the bank of japan continues to send signals of interest rate hikes, many analysts are worried. they warn that the large-scale unwinding of yen carry trades may happen again, leading to another sell-off in global risk assets (such as stocks).

mike wilson, chief u.s. equity strategist at morgan stanley, said in a recent report that if the federal reserve cuts interest rates sharply this month, the u.s. stock market may face the risk of further unwinding of yen carry trades.

he noted that an initial rate cut of more than 25 basis points could support the yen. that would prompt japanese currency traders to move out of u.s. assets after domestic rates move higher, repeating a pattern that sent global markets into turmoil last month.

the unwinding of the yen carry trade, in which investors borrow the currency of countries with lower interest rates, such as japan, and use the funds to invest in higher-yielding assets, such as stocks, elsewhere, was cited as the core reason for the market meltdown during the global panic sell-off in august.

carry trades rely on borrowing currencies with low interest rates and low market volatility. but as the bank of japan raised interest rates, pushing up the yen, investors who borrowed yen were called for margin. these investors were forced to buy yen to close their previous positions, further pushing up the yen and triggering further margin calls, which then triggered a global sell-off.

“the unwinding of the yen carry trade is likely to remain a non-negligible risk factor, and a rapid decline in u.s. short-term interest rates could further strengthen the yen, prompting a negative reaction in u.s. risk assets,” wilson wrote in the report.

since mid-july, gains in u.s. stocks have been tempered by growing concerns about a hard landing for the u.s. economy. the s&p 500 sold off again last week as data showed a cooling job market.

wilson, who accurately predicted last month's pullback in u.s. stocks, said the bond market had reflected that the federal reserve waited too long to ease policy.

the strategist expects market volatility to remain elevated ahead of next week's federal reserve meeting and that u.s. stocks will not rebound anytime soon.

at the same time, kathy lien, managing director of foreign exchange strategy at asset management giant bk asset management, said that as risk aversion in the market intensifies, yen traders will pay close attention to global stock markets. it is expected that the unwinding of yen carry trades will continue, and global stock markets may once again face a period of aggressive selling.

lien predicts that the downward trend in u.s. bond yields and the dollar will continue to push the yen higher. "there is a lot of risk aversion in the market, and if there is a real big sell-off in the stock market, there may be more aggressive liquidation, just like in august."

while the total yen carry trade has shrunk somewhat, lien warned, "i do think there could be a fairly sharp sell-off in global equities this month, especially as the u.s. economy is heading in a direction that many central bankers are worried about."

ben emons, chief investment officer and founder of fed watch advisors, said that leveraged hedge funds have re-increased their short positions in yen futures for some time, indicating that new carry trades have become active again. but at the same time, the yen continues to strengthen against the dollar to near its highest level this year, which may unwind these yen carry trades again.