This morning, the Bank of Japan raised its benchmark rate to 1.0% — the highest level since 1995. If that sounds like a footnote, it isn’t. The yen carry trade is back in the conversation, and that matters for every portfolio with exposure to global markets.
What is the yen carry trade?
For decades, Japan kept interest rates near zero. That made the yen the world’s favorite funding currency. The mechanics are simple: borrow yen* — Japan’s currency — at near-zero rates, convert to dollars, and invest in higher-yielding assets. U.S. stocks, tech, bonds.
As long as Japanese rates stay low and the yen stays weak, the trade works. The problem is the exit.
What happens when it unwinds
When the Bank of Japan raises rates, yen borrowing gets more expensive. The yen strengthens. Suddenly the math reverses — traders who borrowed in yen need to repay in a stronger currency. The fastest way to do that: sell whatever they bought.
U.S. stocks. Tech stocks. Your stocks.
The unwinding doesn’t happen gradually. Positions built over years can move in days.
What happened in August 2024
When the Bank of Japan last hiked aggressively, the S&P 500 fell more than 8% in three trading sessions. The Nikkei dropped 12% in a single day — its worst session since 1987. Global volatility* — a measure of market fear — spiked overnight.
Most investors didn’t know what a carry trade was until they were watching their accounts fall.
Why it matters now
Today’s hike to 1.0% is the highest Japan has seen in 31 years. Officials have signaled further increases. The carry trade that funded trillions in global investment hasn’t disappeared — it’s just gotten more expensive to hold.
Nobody rings a bell when the unwind begins. But when it does, it moves fast.
My take: History doesn’t repeat itself. We do.
Not advice. Just how I see it.