When the Bank of Japan raised its rate to 1.25% on September 18, a lot of people expected a yen carry trade unwind to follow. This one takes a bit more explaining than usual, so stay with me.
The hike was the highest rate in Japan since 1995. In theory, higher rates should make the yen stronger. Instead, the yen got weaker, sliding past 157 per dollar. Two of the nine board members voted no, and traders decided the next hikes might come slowly. No panic, no rush for the exit.
Quick refresher on how the carry trade works: you borrow yen cheaply and invest the money abroad, where rates are higher. When Japan’s rates go up, the deal gets worse. The fear is that everyone leaves at once, like in August 2024.
But some of the biggest Japanese holders of foreign bonds are not hedge funds. They are life insurance companies. They collect money from customers today and pay it back decades later, and together they hold more than $2 trillion in assets. If they sold their US bonds to bring money home, that would be a real unwind. So why aren’t they?
The answer is a rule change. Starting with the year that ended in March 2026, Japanese insurers are measured under a new system called J-ICS. Its main score is the economic solvency ratio, or ESR. The key difference: it values both what insurers own (bonds) and what they owe (future payouts to customers) at today’s market rates.
That matters because of something called duration — how much a bond’s value moves when rates move. I explained it in an earlier post. An insurer’s promises to customers usually last longer than the bonds it holds. When rates rise, the value of those far-away promises drops faster than the value of the bonds. Under the old rules, only the bond losses showed up. Under the new rules, the smaller promises show up too, and they cancel out much of the pain. Nippon Life, Japan’s biggest life insurer, reported an ESR of 195% in March, far above the 100% minimum.
Now compare that with Norinchukin, a big bank for Japan’s farm cooperatives. It had no such cushion. In just nine months of 2024, it sold 12.8 trillion yen of mostly US and European government bonds, and it ended the year with a 1.8 trillion yen loss. That is what a forced sale looks like. Insurers under the new rules are not being forced.
This doesn’t mean nothing is moving. With Japanese yields higher, new money has a reason to stay home — fresh customer payments and cash from bonds that mature. So a yen carry trade unwind, if it comes from this group, looks less like a crash and more like a slow leak: fewer new yen leaving Japan each year, not a fire sale. There is one thing pushing the other way. The new rules also count the risk that customers cancel old, low-rate policies to chase better rates elsewhere. If that grows, insurers may need cash faster.
Japan also has other tools to avoid dumping US bonds. The next BOJ meeting is October 29–30.
My take: Not selling and no longer needing to sell are two different things.
Not advice. Just how I see it.