Japan Yield Curve Shifts into Reverse Carry Trade Opportunity

A steep yield curve in Japan has created a 'reverse carry' trade opportunity for overseas investors. This shift is due to Bank of Japan interest-rate hikes, making the traditional yen-funded carry trade less compelling, according to Rong Ren Goh, fixed income portfolio manager at Eastspring Investments.

The rise in Japanese bond yields has swung asset prices sharply since the US Federal Reserve and BOJ raised rates within two days of each other last week. A decades-long era of ultra-cheap yen funding may give way to a new dynamic where Japan's own bonds become more attractive.

Goh believes that buying ultra-long Japanese government bonds and hedging yen exposure back into dollars or another developed-market currency could potentially give investors higher yields versus comparable bonds in their home markets. The 30-year Japanese government bond above 4% offers an FX-hedged yield 100 to 200 basis points higher than the base currency equivalent, he said.

Goh expects the reverse carry trade to gain broader appeal as investors become more confident of a stabilisation in Japanese bond prices following a selloff that started in 2022. The net yen long position jumped to its highest since July 2025, and the steepening yield curve makes buying dollar bonds no longer offer any compelling carry play.