The Cheapest Money Is Becoming More Expensive

Borrowing yen at almost no cost to invest in U.S. Treasuries, U.S. equities and other assets has long provided a core source of cheap funding for global risk assets. Now that cheapest source of money is becoming more expensive. As yen borrowing costs rise, where does this trading strategy go next?

Central-bank rates: the era of low-cost yen funding is drawing to a close

On July 31, the Bank of Japan held its policy rate at 1.0%, a 31-year high. On August 14, Goldman Sachs estimated the probability of a September rate increase at approximately 75%. As of August 17–18, the U.S. 10-year Treasury yield was 4.72% and Japan's 10-year government bond yield was 2.95%, leaving a spread of 1.77%. The carry trade's profit cushion continues to narrow. At this stage, the shrinking spread is compressing returns, but is not yet enough to drive a large-scale exit from positions.

Joint U.S.–Japan intervention: limited results?

On July 31, the United States and Japan jointly bought yen for the first time in 28 years. USD/JPY quickly fell from 164 to 155, but had climbed back to 159.3 by August 19. Why can joint intervention disrupt the exchange rate only briefly? Essentially, it treats the symptom rather than the cause.

Looking back

In late July 2024, USD/JPY fell from 161 to 142, triggering concentrated position unwinding around the world. Markets were thrown into turmoil on August 5: the Nikkei fell 12.4% in a single day, the VIX exceeded 65 intraday, and the Nasdaq dropped 3.4%. Exchange-rate volatility spread across markets. Global risk assets sold off together, and 50%–75% of carry positions faced forced liquidation. Markets took several weeks to recover, while expectations of rate cuts shifted sharply forward. Many people attributed the sell-off simply to yen appreciation, but the real trigger was a rapid, collective rush to exit crowded positions.

The risk has only been suppressed temporarily

Compared with the 2024 episode, this round lacks support from macroeconomic fundamentals. Back then, an unexpected Japanese rate increase coincided with weak payroll data that raised recession concerns, prompting safe-haven money to flow into the yen. Today, the interest-rate differential still exists, and intervention is supporting the yen's rebound. If Japan raises rates in September, it could trigger another round of unwinding. The risk has been deferred, not cleared.

Three signals to monitor

① Breaks of key USD/JPY levels: 150 and 145.

② The Bank of Japan's policy decision on September 17–18.

③ Changes in the VIX and risk assets: large swings in technology stocks are often a lagging sign of position unwinding.

Conclusion

The yen carry trade has not disappeared. It has changed from an almost certain bet on the interest-rate differential into a source of risk that could be released at any time. It is a key thread connecting global assets and deserves continued attention.

We will continue to follow it. A single article offers only an assessment of current risks; the longer-term pattern becomes clearer when earlier notes are read together. Visit our profile to explore them.