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Tuesday Sep 22 2026 09:22
25 min
The Bank of Japan placed the yen carry trade back in focus on September 18, 2026, when it voted to raise its policy rate from 1.00% to 1.25%, the highest level in around 31 years. Yet the yen weakened after the announcement as traders questioned how quickly further tightening would follow. The reaction demonstrated that currencies respond to expectations and international rate differentials not only to whether a central bank raises rates.
This guide explains what the yen carry trade is, how the strategy works, what causes a carry trade unwind and why it can affect markets far beyond Japan.
The yen carry trade is a strategy in which investors obtain funding in low-yielding Japanese yen and use the proceeds to purchase a higher-yielding currency or asset.
The yen is the funding currency, while the currency or asset offering the higher expected return is the target investment. The difference between the two interest rates is known as the “carry.”
Suppose an investor can borrow yen at 1% and purchase an overseas bond yielding 5%. If exchange rates remain unchanged, the gross interest-rate advantage is approximately four percentage points before fees, hedging expenses and other costs.
Carry-trade capital is not limited to bank deposits or government bonds. Depending on the investor, yen-funded money may be deployed into:
The potential return can be expressed as:
Target-asset return − yen funding cost ± currency movement − trading and financing costs
That exchange-rate component is crucial. A high interest-rate differential does not guarantee profit if the yen strengthens before the position is closed.
Large institutions often construct carry trades using FX swaps, forwards, futures and options rather than physically borrowing cash. However, the underlying economic process can be explained in five stages.
The investor obtains yen at a comparatively low interest rate. Alternatively, derivatives can create a position with similar exposure to borrowing and selling yen.
The yen is exchanged for a currency with a higher interest rate, such as the U.S. dollar, Australian dollar, New Zealand dollar or Mexican peso.
When many investors sell yen simultaneously, the activity can contribute to yen depreciation.
The converted funds may be invested in bonds, money-market instruments, equities or another asset expected to outperform the yen funding cost.
If the target investment earns more than the cost of funding, the investor collects the difference. A weaker yen can add another source of profit because the foreign currency will buy more yen when the trade is closed.
The investor sells the target asset, converts the proceeds back into yen and repays the original funding. A stronger yen at this stage means more foreign currency is required to purchase the yen needed for repayment.
One-Year Scenario | Assumptions | Likely Result Before Costs |
|---|---|---|
Exchange rate unchanged | Borrow at 1%; invest at 5% | Approximately 4% positive carry |
Yen weakens by 5% | Same interest rates | Carry plus a favourable currency return |
Yen strengthens by 8% | Same interest rates | Currency loss probably exceeds the carry |
These figures are simplified educational examples, not current rates or guaranteed returns.
Investors can hedge the currency risk, but hedging is not free. The forward exchange rate usually reflects much of the interest-rate differential, meaning a fully hedged strategy may lose the very carry it was designed to capture.
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Japan’s low-rate environment developed after the collapse of its property and equity bubble in the early 1990s. The BOJ moved rates towards zero in the late 1990s and later adopted negative interest rates and extensive asset purchases to combat deflation.
This gave international investors access to several conditions favourable to carry trading:
The modern strategy gained further momentum after 2013 under the monetary easing associated with Abenomics. It expanded again during 2022–2024 as the Federal Reserve raised rates rapidly while the BOJ maintained exceptionally loose policy.
Hedge funds, banks, insurers, pension funds, corporations and retail FX traders may all participate in yen-funded strategies. Some use loans, while others create similar exposure through derivatives.
The exact size is impossible to measure because many positions are held off balance sheet. Reuters cited around $350 billion of short-term external loans from Japanese banks as one narrow proxy in 2024. The Bank for International Settlements estimated a rough middle range of ¥40 trillion, or $250 billion, entering the August 2024 volatility event and noted that data gaps may cause that figure to understate the trade.
Broader estimates can be much larger, but not every overseas investment connected with Japan represents a speculative carry position.
>> You may also like: USD to JPY Forecast 2026: Will the US Dollar Rise or Fall Against the Japanese Yen?
A yen carry trade unwind occurs when investors close yen-funded positions by selling their target investments and buying back yen to repay their funding.
An unwind may begin when:
The process can develop into a feedback loop. A stronger yen creates losses for investors who are short the currency. They sell foreign assets and buy yen to close their positions. That additional yen demand pushes the currency higher, creating further losses and potentially triggering more liquidations.
Leverage makes this cycle more dangerous. Carry trades typically aim to earn relatively small, consistent returns during calm markets, so some investors use borrowed capital to increase their exposure. A currency move that appears modest in the spot market can therefore cause a much larger percentage loss on the investor’s capital.
A carry unwind should not automatically be treated as the sole cause of a market decline. Economic data, valuations, central-bank policy and risk sentiment may initiate the sell-off. Carry-trade liquidation then amplifies the original shock.
On September 18, 2026, the BOJ voted 7–2 to target an overnight rate of approximately 1.25%, up from 1.00%. The new rate was scheduled to take effect on September 24. The official BOJ statement said additional increases could follow if economic, inflation and financial conditions justified further adjustment.
Higher BOJ rates affect the carry trade in several ways:
However, a BOJ hike does not guarantee a stronger currency. The yen weakened after the September decision because the increase was widely anticipated and investors did not receive a sufficiently forceful indication of rapid future tightening. Overseas rates also remained considerably higher.
Policy Scenario | Likely Carry-Trade Effect | Possible Yen Reaction |
|---|---|---|
BOJ hikes while the Fed pauses or cuts | Yield gap narrows quickly | Yen may strengthen |
BOJ and Fed both raise rates | Rate gap may remain wide | Carry trade could persist |
BOJ hikes but gives cautious guidance | Expectations are reduced | Yen may remain weak |
BOJ pauses while overseas rates stay high | Funding advantage remains | Carry positions may rebuild |
BOJ signals faster tightening | Funding risk rises | Unwind risk increases |
The future interest-rate path matters more than a single decision. Traders should also monitor Japanese inflation, wages, government bond yields, Federal Reserve policy and possible currency intervention.
Real interest rates matter as well. Even at 1.25%, Japanese monetary conditions may remain relatively loose if inflation is near or above the BOJ’s 2% target.
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Carry trades connect yen funding with investments across different countries and asset classes. Closing them can therefore transmit volatility far beyond the foreign-exchange market.
A carry unwind normally creates demand for yen because investors need to repurchase the currency to repay their funding. USD/JPY may fall as the yen strengthens against the dollar.
High-yielding target currencies can move in the opposite direction. The Mexican peso, Australian dollar, New Zealand dollar, Brazilian real and South African rand may come under pressure as investors withdraw from carry positions.
The quotation convention is important: when USD/JPY falls, fewer yen are required to buy one dollar, indicating that the yen has strengthened.
Yen-funded money may be invested in equities, particularly liquid technology, momentum and growth stocks. If the funding trade becomes unprofitable, investors may sell these positions quickly.
Japanese exporters can also be affected by a stronger yen because their overseas revenue becomes less valuable when converted into the domestic currency. Banks may respond differently: higher Japanese rates can improve lending margins, but rapid bond-market moves and credit stress can introduce new risks.
The August 2024 episode demonstrated how quickly deleveraging can spread. According to the BIS, the TOPIX fell 12% on August 5, the S&P 500 lost 3% during the session and the VIX briefly moved above 60. Markets then stabilised quickly, with the S&P 500 recovering its losses by the end of that week.
Investors closing positions may sell overseas government bonds, emerging-market debt or corporate credit. These sales can push yields higher and tighten financial conditions.
Japanese investors may also repatriate capital as domestic yields become more competitive. Whether this materially affects global bonds depends on the speed of the adjustment and whether the funds move into Japanese bonds, cash or other investments.
Crypto markets trade continuously and can be liquidated quickly when investors need cash to meet margin requirements. That means Bitcoin and other cryptocurrencies may fall even when the original carry positions were established in currencies, equities or bonds.
The BIS found that Bitcoin and Ethereum suffered losses of as much as 20% during the August 2024 episode. The movement suggested that margin calls and leveraged retail positions contributed to cross-asset selling.
No single indicator confirms that a carry trade unwind has begun. The risk becomes more credible when several signals appear together:
The speed of the move can be more important than the absolute level. A gradual appreciation allows positions to adjust, while a sudden yen surge can trigger forced deleveraging.
Retail traders do not need to recreate an institutional carry trade by borrowing yen and purchasing overseas bonds. Forex CFDs provide a more direct way to speculate on movements in currency pairs such as USD/JPY without exchanging or owning the underlying currencies.
A trader can buy USD/JPY when expecting the dollar to strengthen relative to the yen or sell the pair when expecting yen appreciation. CFDs also provide leveraged exposure, meaning the initial margin can be smaller than the total position value.
This accessibility comes with significant risk. Leverage magnifies losses as well as potential gains, while spreads and overnight financing affect the result. Holding a leveraged USD/JPY CFD is not the same as earning a guaranteed institutional carry return.
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Search for the USD/JPY instrument and check the buy price, sell price, spread and overnight financing conditions.
Compare interest-rate expectations, inflation data, wage growth, bond yields and central-bank guidance. Economic calendars can help identify upcoming policy announcements.
Choose Buy if you expect USD/JPY to rise. Choose Sell if you expect a stronger yen to push USD/JPY lower.
Determine the trade size according to available margin, currency volatility and the maximum amount you are prepared to lose.
Consider adding stop-loss and take-profit orders. During a rapid unwind, slippage or price gaps can cause execution away from the requested level.
Track rate expectations, USD/JPY, volatility and margin requirements. Also monitor overnight charges if the position remains open beyond the trading day.
Forex CFDs are leveraged products and can generate rapid losses. A correct view of BOJ policy does not guarantee a profitable trade because timing, financing and execution also affect the outcome.
>> Read more: What Is Forex Trading and How Does It Work?
The answer to “what is the yen carry trade?” begins with a simple rate difference: borrow or sell low-yielding yen and invest in a higher-returning asset. The risks become more complicated once leverage and exchange rates are included.
The BOJ’s September 2026 increase to 1.25% raised yen funding costs, but the currency’s subsequent weakness showed that forward guidance and the U.S.–Japan rate gap remain critical. Gradual tightening may reduce the trade’s appeal without causing major disruption. A sudden yen rally combined with high leverage, however, could force asset sales and amplify global volatility.
The yen carry trade involves borrowing or selling Japanese yen at a relatively low interest rate and using the money to purchase an asset offering a higher return. The investor aims to earn the difference while avoiding losses from yen appreciation.
An unwind occurs when investors close yen-funded positions. They sell the currencies or assets they purchased, convert the proceeds into yen and repay their funding. Large-scale yen buying can strengthen the currency and force additional positions to close.
No. A rate hike may already be priced into the market. The yen can still weaken if the BOJ provides cautious guidance, overseas central banks remain more hawkish or investors expect the rate differential to stay wide.
Some investors use yen funding to purchase global equities. If the yen strengthens or funding costs rise, they may have to sell those stocks to reduce leverage or repay loans. The resulting sales can amplify an existing market decline.
Yes, although its attractiveness has changed. The BOJ’s 1.25% policy rate makes yen funding more expensive, but interest rates in several overseas markets remain higher. The trade may persist while that differential is sufficiently large and the yen remains stable.
USD/JPY will often decline because investors sell dollars or other assets and repurchase yen. The move is not guaranteed, however, because Federal Reserve policy, economic data, intervention and general risk sentiment also influence the currency pair.
Risk Warning: This article is provided for informational purposes only and does not constitute investment advice, investment research, or a recommendation to trade. The views expressed are those of the author and do not necessarily reflect the position of Markets.com. When considering shares, indices, forex (foreign exchange), and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and may not be suitable for all investors. Leveraged products can result in capital loss. Past performance is not indicative of future results. Before trading, ensure you fully understand the risks involved and consider your investment objectives and level of experience. Cryptocurrency CFD trading restrictions may apply depending on jurisdiction.
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