Forex strategist suggests that the unwinding of the carry trade could cause August-like chaos, as the yen strengthens.

• The Japanese yen is predicted to rise further due to the anticipated decline in U.S. yields and the dollar.
• The carry trade is expected to unwind further and may reach the same level of aggression as seen in August, when a significant sell-off occurred.

The continuation of the yen carry trade unwinding in September poses a risk of another significant sell-off, as per Kathy Lien, managing director of forex strategy at BK Asset Management.

On Monday, Lien stated on CNBC's "Squawk Box Asia" that the Japanese yen would continue to rise due to the decline in U.S. yields and the dollar.

Lien stated that we are experiencing a risk-off mood, which is evident in financial markets, and this will result in the continuation of the unwinding of carry trades. Yen traders will monitor equity prices and derive their cues from them. September is typically a volatile month for stocks.

If we experience a significant sell off in stocks, it may result in a more aggressive unwind, similar to what we observed in August, she stated.

The act of borrowing in a currency with low interest rates and subsequently investing the proceeds into higher-yielding assets in another location is known as a carry trade.

Richard Kelly, head of global strategy at TD Securities, stated on "CNBC Squawk Box Europe" last month that he believes there is still a lot that can unwind, particularly due to the undervalued yen. This will likely result in changes to valuations over the next one to two years, which will have spillover effects.

The Bank of Japan's negative interest rates have made the Japanese yen one of the largest carry trades globally, with a substantially weaker value compared to its peers.

In August, the BOJ's decision to hike interest rates caused the yen to strengthen and resulted in a significant sell-off in global markets, marking the beginning of the unwinding of the carry trade.

According to Reuters, some analysts estimated that the yen carry trade could total as much as $4 trillion in the aftermath of the August rout.

Despite markets recovering from losses, Lien cautions that a repeat of the sell-off could occur as investors monitor equity prices and the U.S. economy faces growing challenges.

On Friday, the S&P 500 experienced its worst week since March 2023 due to a weak August jobs report, resulting in a decline in indexes on Wall Street.

"It is possible that there may be some intense selling of stocks this month, given the current direction of the U.S. economy, which many central bankers are concerned about."

On Monday, Japan was at the forefront of losses in Asia due to its second-quarter GDP falling short of analysts' predictions.

The BOJ's ability to raise interest rates may be limited if GDP growth remains soft.

— CNBC's Sam Meredith contributed to the report.