Why do i hear talk of the unwinding of the carry trade?

So ever since the Japan raised interest rates i hear talk of the unwinding of carry trades. Why is that? The interest rate is still extremely low (i think .25% or .50%) and it could stand many more hikes before the carry trade really becomes not worth your time (in my opinion).

Do these carry traders really think that a little jump in interest is a big deal from a swap point of view? Or is it a fear that the pair will drop sharply and they will lose more pips than interest due to others dropping the carry trade and buying back the yen in their pair?

Definitely more the exchange rate fear since that more directly impacts the final value of the carry trades, though the BOJ rate hike concern is there as well.

Here’s what scares them. One or more major players decided to unwind their position. That not only puts upward pressure on the value of the JPY, but also downward pressure on the value of the carry trade positions themselves. To create a carry trade they have to borrow in JPY (sell JPY-based fixed income instruments) and deposit in another currency (buy USD, AUD, etc based fixed income instruments). In unwinding those trades they would have to buy back their shorts and sell off their long positions, adversely impacting the prices of those securites which are held by others still in the carry trade. That would lead to more unwinding of those positions, and so on.

If it happened in an orderly fashion, then it wouldn’t cause too much harm, but if not it could get ugly.

Ironically, the unwind process would tend to put downward pressure on JPY interest rates and upward pressure on the other global rates in question.