The yen carry trade has once again become a major talking point in global financial markets.
The strategy sounds simple: investors borrow money in Japan at relatively low interest rates and use those funds to invest in assets or currencies that offer higher returns. The potential profit comes from the difference between the borrowing cost and the return on the investment.
The problem is that the trade can work in both directions. If the Japanese yen suddenly strengthens or the Bank of Japan (BOJ) raises interest rates, investors may rush to unwind their positions. That can push the yen higher and put pressure on stocks, bonds and other riskier assets around the world.
That is why the yen carry trade matters far beyond Japan.
What Is the Yen Carry Trade?
The yen carry trade is a strategy in which an investor borrows Japanese yen at a relatively low interest rate and converts it into another currency to invest in higher-yielding assets.
For example, an investor could:
- Borrow ¥100 million in Japan.
- Convert the yen into U.S. dollars.
- Invest the dollars in an asset offering a higher return.
- Earn the difference between the investment return and the cost of borrowing.
- Convert the proceeds back into yen and repay the original loan.
The strategy becomes attractive when the interest-rate gap between Japan and other economies is wide.
Estimates that annualised returns on dollar-yen carry trades have typically been around 2.5% to 3.5% recently, although the potential return can also be affected significantly by movements in the yen.
Why Is the Yen Used?
Japan has historically had very low interest rates compared with many other major economies.
That made the yen an attractive funding currency. Investors could borrow yen relatively cheaply and deploy the money into higher-yielding currencies such as the U.S. dollar, Mexican peso, New Zealand dollar and emerging-market currencies.
The trade became particularly popular during 2022 and 2023, when the U.S. Federal Reserve was aggressively raising interest rates while the BOJ maintained an extremely accommodative monetary policy.
As a result, investors had an incentive to borrow yen and seek better returns elsewhere.
How Does the Yen Carry Trade Work?
Consider a simplified example.
Suppose an investor borrows ¥100 million at a low interest rate and converts the money into U.S. dollars.
If the investment generates a higher return than the cost of borrowing, the investor earns a positive carry.
But there is another variable that can make or break the trade: the exchange rate.
If the yen weakens against the dollar, the investor may benefit when converting the investment back into yen.
If the yen strengthens sharply, however, the investor needs more dollars to repay the same yen-denominated loan.
That can turn a profitable trade into a loss.
In simple terms
Yen weakens → carry trade generally becomes more attractive
Yen strengthens → carry trade becomes more difficult to maintain
This is one reason currency movements can have an outsized impact on global markets.
Read More: Rupee at 95.55: Why the Indian Rupee Is Falling and How RBI Is Defending It
What Is the Current Yen Interest Rate?
As of September 11, 2026, Japan’s policy rate is 1.00%, with markets expecting the BOJ to raise it by another 25 basis points to 1.25% at its upcoming meeting. The policy rate to its highest level in 31 years.
The expected increase is important for carry-trade investors because higher Japanese interest rates raise the cost of using the yen as a funding currency.
At the same time, the yen has been strengthening. The U.S. dollar was trading around ¥154.11 per dollar on September 11.
The combination of a stronger yen and expectations of higher Japanese rates has increased attention on the potential unwinding of yen-funded positions.
| Period | BOJ Policy Rate | Carry Trade Context |
|---|---|---|
| Jan 2016 | -0.10% | Negative-rate environment made the yen a low-cost funding currency |
| Mar 2020 | -0.10% | Yen remained a very low-cost funding currency |
| Mar 2024 | -0.10% | BOJ ended its negative interest-rate policy |
| Jul 2024 | 0.25% | Higher Japanese rates increased pressure on yen-funded positions |
| Jan 2025 | 0.50% | Further rate normalisation narrowed the rate gap |
| Jul 2025 | 0.50% | BOJ maintained the rate amid changing inflation and growth conditions |
| Current* | 1.00% | Higher funding costs make yen carry trades less attractive |
*Current rate should be updated against the latest BOJ announcement before publication.
Why Is the Yen Carry Trade Under Pressure?
The biggest concern is that the conditions supporting the trade are changing.
The BOJ is moving away from the ultra-low-rate environment that helped make the yen an attractive funding currency. At the same time, the yen has recently strengthened as investors anticipate further monetary tightening.
The yen reached a seven-month high earlier in September as expectations of faster BOJ tightening and possible repatriation of Japanese capital increased.
For investors holding large leveraged carry positions, even a relatively quick currency move can create significant losses.
That can force investors to close positions.
What Happens When the Carry Trade Unwinds?
An unwinding happens when investors start reversing the original trade.
Instead of borrowing yen and buying higher-yielding assets, investors may:
Sell riskier assets → Convert money back into yen → Repay yen borrowing
If many investors do this simultaneously, the process can become self-reinforcing.
More yen buying can push the currency higher.
A stronger yen can create larger losses for remaining carry-trade positions.
Those investors may then close their trades as well.
The result can be a sharp increase in market volatility.
Impact on Global Stock Markets
The yen carry trade can influence stock markets because borrowed money is often deployed into riskier assets.
When the trade is working, relatively cheap funding can support investments in equities and other assets.
When the trade reverses, investors may reduce exposure to those assets to raise cash and repay their yen liabilities.
This can create selling pressure in markets far beyond Japan.
A notable example occurred in 2024, when a surprise BOJ rate hike triggered a rapid yen appreciation. The Nikkei subsequently suffered a 12.4% one-day decline, illustrating how quickly an unwind can affect equities.
However, the current situation is not identical. BOJ officials and markets have been signalling the possibility of further tightening, meaning investors have had more time to adjust their positions.
Impact on Crypto Markets
The yen carry trade can also matter for crypto, although the relationship is not always direct.
Crypto assets are generally viewed as part of the broader risk-asset universe. When global investors reduce leverage and move toward safer assets, cryptocurrencies can also experience selling pressure.
A sharp carry-trade unwind could therefore affect crypto through:
- Lower global liquidity
- Reduced leverage
- Risk-off sentiment
- Selling of speculative assets
- Stronger demand for traditional safe-haven assets
- Higher volatility across financial markets
This does not mean that every yen move will trigger a crypto sell-off. Crypto prices are influenced by many other factors, including monetary policy, institutional flows, regulation, network activity and investor sentiment.
How Large Is the Yen Carry Trade?
There is no single figure that captures the exact size of the global yen carry trade because many positions are created through different financial instruments and can involve leverage.
However, estimates suggest that the underlying borrowing activity is substantial.
A Jefferies analysis cited by Reuters estimated that cross-border yen borrowing reached 360 trillion yen, or about $2.34 trillion, in March. This is a proxy for the scale of yen-funded activity rather than a precise measurement of carry-trade positions.
That distinction is important because not all yen borrowing represents a traditional carry trade.
Why Investors Are Watching the BOJ
The Bank of Japan is now at the centre of the story.
On September 11 that the BOJ is expected to raise its policy rate by 25 basis points to 1.25%, although the pace of future increases remains uncertain.
Investors are therefore watching:
- BOJ interest-rate decisions
- Japanese inflation
- Yen movements
- U.S. interest rates
- U.S.-Japan yield differences
- Global risk sentiment
- Japanese investor capital flows
The larger the change in the interest-rate differential or currency exchange rate, the greater the potential impact on carry-trade positions.
Yen Carry Trade and the Indian Market
The effects can also reach Indian markets.
If a large carry trade unwinds globally, investors may reduce exposure to emerging-market assets. This can affect currencies, equities and other risk-sensitive investments.
For India, global risk aversion can influence:
- Foreign portfolio investment flows
- The Indian rupee
- Indian equities
- Bond yields
- Market volatility
- Capital flows into emerging markets
The yen carry trade is therefore not something that Indian investors need to trade directly to be affected by it.
Is the Yen Carry Trade Ending?
Not necessarily.
The strategy is becoming more challenging as Japan moves toward higher interest rates and the yen becomes stronger, but carry trades can continue as long as there is a meaningful difference between funding costs and investment returns.
The bigger question is whether that difference remains attractive after accounting for currency risk.
For now, markets are closely watching the BOJ. The possibility of another rate increase, combined with recent yen strength, means the risks around yen-funded positions are receiving considerably more attention than they did when Japanese rates were near zero.
Yen Carry Trade: Key Takeaways
| Factor | What it means |
|---|---|
| Yen carry trade | Borrow yen and invest in higher-yielding assets |
| Main attraction | Low Japanese borrowing costs |
| Major risk | Yen appreciation |
| Current BOJ rate | 1.00% |
| Expected next rate | 1.25%, if the expected hike occurs |
| USD/JPY | Around ¥154.11 per dollar on Sept. 11, 2026 |
| Recent yen trend | Yen has strengthened significantly |
| Global impact | Can affect equities, currencies and other risk assets |
| Crypto impact | Potentially higher volatility during a broad risk-off move |
Final Thoughts
The yen carry trade is ultimately a story about interest rates, currencies and investor risk appetite. When borrowing in yen is cheap and the yen remains weak, the strategy can look attractive. But when Japanese rates rise or the yen strengthens quickly, the economics can change just as quickly.
For investors, the important lesson is not to treat the carry trade as an isolated currency strategy. Its effects can spread through global markets, particularly when large leveraged positions are unwound. Keeping an eye on Bank of Japan policy, USD/JPY movements and broader risk sentiment can provide useful context when markets become unusually volatile.
