Yen carry trade

In plain terms

Japan kept interest rates near zero for many years. That made it cheap to borrow yen, convert it into dollars and invest in higher-yielding assets such as US Treasuries or stocks. Investors earn the rate gap, and if the yen weakens, the debt shrinks in dollar terms and profits grow.

Why it matters

Nobody knows the exact size, but large sums across global markets are believed to be funded this way. The danger comes when Japanese rates rise or the yen jumps suddenly: investors rush to sell assets to repay their yen loans, and markets everywhere can tumble. In early August 2024, a sharp rise in the yen after a Bank of Japan rate hike preceded steep falls in the Nikkei and other markets, a widely cited example.

How it connects to markets

• Japanese rate hikes or a sudden yen rally (carry unwind): the yen strengthens and money tends to leave US tech, emerging markets and crypto
• A wide US-Japan rate gap: more carry trades, a weaker yen and firmer risk assets
• Bank of Japan meetings and Fed decisions largely set the yen's direction

Where to check

• Bank of Japan monetary policy meeting schedule