The yen carry trade is a strategy in which an investor obtains low-cost funding in Japanese yen and uses the money to buy assets denominated in a currency offering a higher return. The potential profit comes from the difference between the funding cost and investment yield, but a rise in the yen can erase that return and produce substantial losses.
The strategy returned to the spotlight in September 2026 after the yen climbed to a seven-month high and investors increased their expectations of further Bank of Japan interest-rate rises. A stronger yen and higher Japanese borrowing costs both undermine the trade, raising the possibility that investors will sell foreign assets to repay yen-funded positions.
The issue has become more significant after the Bank of Japan’s latest interest-rate increase, which exposed disagreement among policymakers over inflation and the pace of tightening.
That matters beyond the currency market because yen-funded money can flow into government bonds, corporate debt, equities and emerging-market assets. When investors close these positions together, the resulting demand for yen and sale of other assets can transmit volatility across global markets.
A straightforward version of the trade has four stages:
Institutional investors do not necessarily take out conventional yen loans. Similar exposure can be created through foreign-exchange forwards, swaps, futures and options.
In simplified terms, the return consists of:
Investment return + currency gain or loss − yen funding cost − transaction and hedging costs
If the exchange rate remains unchanged, the funding and investment rates drive the result. A weaker yen increases the number of yen received when the foreign investment is converted back. A stronger yen has the opposite effect and can overwhelm the interest advantage.
Consider a hypothetical investor who:
After one year, the investment is worth approximately $69,333.33. The investor owes ¥10.1 million, including ¥100,000 of borrowing interest.
| Exchange rate after one year | Value after conversion | Amount owed | Approximate outcome |
|---|---|---|---|
| ¥150 per dollar | ¥10.40 million | ¥10.10 million | ¥300,000 profit |
| ¥160 per dollar | ¥11.09 million | ¥10.10 million | ¥993,000 profit |
| ¥140 per dollar | ¥9.71 million | ¥10.10 million | ¥393,000 loss |
The trade breaks even at approximately ¥145.67 per dollar. A fall in the dollar-yen rate below that level would produce a loss despite the investment paying three percentage points more than the funding cost.
Real trades may also be affected by asset-price changes, bid-offer spreads, collateral requirements, financing terms, fees and tax.
Japanese interest rates remained extremely low for many years as the Bank of Japan attempted to support economic activity and achieve sustained inflation. Yen funding consequently appeared attractive when rates and investment yields were higher elsewhere.
The size of the interest-rate difference changes over time. Following their July 2026 meetings, the Bank of Japan was guiding its overnight call rate at around 1%, while the Federal Reserve maintained a federal funds target range of 3.5% to 3.75%.
These rates illustrate the broad monetary-policy gap as of July 2026. They are not necessarily the rates at which an investor can borrow yen or invest dollars, so they should not be interpreted as a guaranteed return of 2.5 to 2.75 percentage points.
The Swiss franc has also been used as a funding currency. Investors can move between funding currencies as borrowing costs, exchange-rate expectations and volatility change.
An investor with yen funding must eventually buy yen to repay the position. If the yen strengthens, more of the investment currency is required to purchase the same amount of yen.
A trader facing losses may have to sell foreign assets, convert the proceeds into yen or provide additional collateral. When many investors do this simultaneously, their yen purchases can push the currency higher, imposing further losses on remaining short-yen positions.
The effect can be particularly strong when positions are leveraged. Research published by the Bank for International Settlements in May 2026 found that large speculative short positions can amplify the response of funding currencies to unexpected monetary-policy tightening.
The pattern can become self-reinforcing:
A rising yen does not by itself prove that a widespread carry-trade unwind is underway. Positioning, leverage, market liquidity and the speed of the currency movement also matter.
An increase in Japanese rates can narrow the gap between yen funding costs and the return available elsewhere. If the decision is tighter than markets expected, it may also support the yen and increase the foreign-currency cost of repaying unhedged yen funding.
Expectations are important. An anticipated increase may already be reflected in exchange rates and asset prices, giving investors time to reduce their exposure. An unexpected decision is more likely to trigger an abrupt adjustment.
The Bank of Japan raised its overnight call-rate target to around 0.25% in July 2024. This contributed to a reassessment of yen-funded positions, but it was not the sole cause of the severe market volatility that followed.
A BIS examination of the August 2024 episode identified several connected factors: a strengthening yen, the BOJ decision, disappointing US employment data, crowded leveraged trades, rising volatility and increased margin requirements. On August 5, Japan’s TOPIX index fell 12% in a single session.
Carry-trade deleveraging amplified the disruption, but it would be misleading to attribute the entire market fall to the BOJ decision or to the carry trade alone.
There is no authoritative total.
Exposure can be created through bank loans, forwards, swaps, futures, options and positions embedded within broader portfolios. Much of the foreign-exchange derivatives market operates over the counter, while reported yen lending also finances legitimate commercial, investment and hedging activity unrelated to speculative carry trades.
A September 2026 Reuters report cited a Jefferies analysis that placed cross-border yen borrowing at ¥360 trillion as of March. This is a measure of broad yen-denominated borrowing, not the value of carry trades.
For comparison, the BIS estimated that yen-funded foreign-exchange carry positions before the August 2024 disruption had a rough central estimate of about ¥40 trillion, while warning that data gaps probably caused that estimate to understate the total. Other measures covering broader yen funding produced considerably larger figures.
Speculative yen futures positions provide a more frequent indicator, but they capture only a small part of the market. Futures data can reveal changes in positioning without establishing the total amount invested through carry strategies.
Any claim that the yen carry trade has one precise dollar or yen value should therefore be treated cautiously.
No. A carry trade exchanges a potential yield advantage for several connected risks.
A relatively modest appreciation in the yen can eliminate the expected interest return. In the worked example, the position begins losing money when the dollar-yen rate falls below approximately ¥145.67.
The higher-yielding bond, currency or equity can fall in value. An investor can lose money even if the yen remains unchanged.
Borrowed money and derivatives can amplify returns, but they also magnify losses. A trader may be forced to close a position before the expected investment return is earned.
Higher Japanese rates increase the cost or reduce the attractiveness of yen funding. Lower rates in the investment currency can reduce the return on the asset being purchased.
If many investors attempt to close similar positions, trading costs can increase and prices may move sharply before all positions can be completed.
Official currency intervention can produce sudden exchange-rate changes. Finance Gazette has separately reported on intervention intended to support the yen.
An investor can use a forward contract or another derivative to reduce exchange-rate risk. Doing so, however, changes the economics of the position.
The forward exchange rate normally reflects much of the short-term interest-rate difference between the currencies. Cross-currency basis movements, transaction costs and the investor’s precise funding terms can also affect the price.
As a result, fully hedging the currency exposure may remove much of the apparent carry. The headline yield difference is most attractive when an investor remains exposed to exchange-rate movements—and that exposure is one of the strategy’s principal risks.
The impact depends on where the yen-funded money has been invested. When carry positions expand, they can support demand for foreign bonds, equities, emerging-market currencies and other higher-yielding assets.
During an unwind, investors may sell those holdings to meet margin calls or obtain yen for repayment. Selling can spread between markets when leveraged funds hold several positions exposed to the same increase in volatility.
The yen carry trade is therefore more than a wager on two interest rates. Its return depends on funding costs, investment performance, exchange rates, leverage and market conditions—and those variables can move against investors at the same time.
