The Vast Yen Carry Trade: Where Are the Risks?

Borrowing the cheapest money

Japan's interest rates have long been extremely low. Institutions can borrow yen at low cost, convert them into dollars, and buy higher-returning assets. This is known as a carry trade. But borrowed money must eventually be repaid, and the timing of repayment matters too.

How large is yen-funded borrowing?

According to Jefferies (NYSE: JEF), using Bank for International Settlements data, outstanding global cross-border yen borrowing was about ¥360 trillion as of March this year, equivalent to roughly $2.3 trillion.

An important qualification: this figure covers only lending and borrowing balances recorded on banks' balance sheets. Many institutions use derivatives, such as swaps, to build yen funding exposures indirectly. Those positions are not included in these statistics, and there is no publicly available statistical measure of that funding.

For comparison, the figure under the same statistical definition was ¥216 trillion in December 2021. In just over four years, cross-border yen borrowing within the banking system grew by about two-thirds.

Three conditions for profit, but only one needs to fail

Making money requires three things: low borrowing costs, a sufficiently wide interest-rate differential, and profitable assets. All three are necessary. A trade can unravel if just one fails. But not every unwind is caused by a deterioration in fundamentals.

In August 2024, for example, those three fundamentals had not deteriorated materially. Markets simply began to anticipate a narrower future rate differential. Crowded carry positions rushed to close at the same time, buying yen together to repay their borrowing. The exchange rate rose abruptly, triggering a disorderly unwind. Even when fundamentals can still support the strategy, excessive crowding alone can create a short-term disaster.

Intervention can move the exchange rate without dislodging the vast stock of borrowing

Just over a month ago, Japan's Ministry of Finance bought yen in several rounds of intervention, spending a total of ¥15.3993 trillion, or about $96 billion—a record intervention amount. Against ¥360 trillion of outstanding cross-border yen borrowing, that was only about one twenty-third of the total. Such spending can certainly move exchange rates in the short term and temporarily slow yen depreciation. But while intervention can move the exchange rate, it cannot dislodge the enormous stock of carry-trade funding.

This rate increase did not trigger a disorderly unwind

During the August 2024 unwind, Japan raised rates by 15 basis points while U.S. rates remained unchanged. The yen strengthened rapidly, carry trades unwound in reverse, the Nikkei 225 fell 12.4% in a single day, and the VIX briefly reached 65.73.

Japan raised rates again by 25 basis points on September 18, 2026. This time, the yen weakened instead. USD/JPY reached a high of 158.05 and closed at 156.84. Unlike August 2024, both the United States and Japan raised rates on this occasion, leaving a U.S.–Japan rate differential of 2.50–2.75 percentage points.

Although there was no disorderly unwind this time, the risks still deserve attention. Borrowed money, after all, must eventually be repaid.