BOJ-Fed Coincidence Triggers Yen Carry Trade Unwind

The Bank of Japan's September rate decision will be announced on Friday, September 18, coinciding with the Federal Reserve's meeting. This convergence is significant as it will compress the interest rate spread that has funded trillions of dollars in yen-denominated borrowing.

This carry trade has provided cheap funding to investors in AI chip stocks, US Treasuries, and growth equities. The correlation between the yen exchange rate and the Philadelphia Semiconductor Index was higher than the correlation between the yen and Japan's TOPIX index in 2024, indicating that AI chip stocks were tracking yen moves more closely.

The Bank for International Settlements estimated visible carry trade exposure at approximately $764 billion in August 2024. However, estimating the total size of the yen carry trade is a methodological challenge, and experts agree on the direction: the trade has proliferated substantially over recent years.