The Japanese Yen Carry Trade
The Japanese Yen Carry Trade and Its Unwinding
What Is the Yen Carry Trade?
The Japanese yen carry trade is a strategy where investors borrow yen at very low interest rates from Japan and invest in higher-return assets around the world, such as U.S. stocks or emerging market bonds. This approach has been popular for years, thanks to the Bank of Japan’s (BOJ) near-zero rates to combat low inflation. But now, in early 2026, the trade is unwinding as the BOJ raises rates and shifts policy, creating ripples in global markets.
How the Carry Trade Boosted Global Markets and Risk-Taking
Think of the carry trade as adding extra cash to the world’s financial system. Investors borrow cheap yen and pour it into other markets, lifting asset prices everywhere—from U.S. tech stocks to cryptocurrencies. At its peak a few years ago, the trade involved massive amounts of money, fueling strong market rallies. This easy funding encouraged bold bets on riskier investments, creating a “buy everything” mood during good times. But when the trade reverses, that extra cash dries up, turning markets cautious.
Why Rising Rates in Japan Are Forcing the Unwind
Higher rates make borrowing yen more expensive, cutting into profits. The BOJ has lifted rates to 0.75% as of early 2026, with more increases possible soon. This shrinks the gap between Japan’s rates and those elsewhere, like in the U.S. Plus, rising rates often strengthen the yen, making it costlier to pay back loans. The result? Investors sell off their holdings to cover debts, sparking a chain reaction of more selling and market swings. Much of the trade has already unwound over the past couple of years, but billions remain at risk, speeding up the process now.
How the Unwinding Shakes Up Markets
When the trade unwinds, money is pulled out of global assets, leading to quick drops. Stock markets, especially in the U.S. and Japan, often see sharp sell-offs in high-growth areas like tech. The yen gets stronger, hurting currencies from places like Mexico or Brazil. Bonds can react too—U.S. Treasuries might attract safety seekers, while Japanese bonds draw money home. Overall, it feels like a surprise tightening of money worldwide, raising recession worries and boosting market ups and downs, even in crypto and emerging economies.
Past Troubles from the Carry Trade and How Long They Last
The yen carry trade has sparked market problems several times, often linked to BOJ changes or big global events. Key examples include the late 1990s Asian crisis, the 2008 financial meltdown, a brief 2016 hiccup from negative rates, the 2020 pandemic shock, and the 2024 summer turmoil. That’s at least half a dozen major cases. The rough patches usually last from a few weeks in mild ones to over a year in bad ones, depending on the wider economy. The current unwind, tied to ongoing BOJ shifts, could bring months of choppiness.
What Tends to Hold Up During an Unwind
During periods of unwinding, investors typically move out of riskier assets and into safer havens. The yen often strengthens, as capital returns to Japan and investors seek the relative safety of Japanese bonds. U.S. government bonds tend to attract buyers looking for protection, while gold frequently rises as a shield against market turmoil and inflation.
Stocks in defensive sectors, such as utilities and healthcare, usually weather the storm better than high-growth or speculative areas. Oil and certain commodities can sometimes perform well as inflation hedges, but they remain unpredictable and can fluctuate with demand and economic outlook.
It’s best to avoid high-volatility tech stocks or emerging market equities, as they tend to experience the sharpest declines early in an unwind. Commodity performance can be mixed: while precious metals like gold stand out as reliable safe havens—appreciating during times of uncertainty, inflation, or currency weakness—others such as base metals are more sensitive to economic downturns and can decline if recession fears mount. Silver, though more volatile, may benefit from both safe-haven demand and its industrial uses, while platinum and palladium may find support from supply constraints but are less consistent due to their ties to jewelry and automotive industries. Agricultural commodities like fertilizer, wheat, corn, and soybeans can offer some resilience if inflation persists, given steady food demand and the potential for supply shocks, but they are still influenced by weather conditions and the broader economic cycle.
