Yen Carry Trade Faces Uncertain Future Amid Expected Rate Hikes

The yen carry trade has been a key component of global markets for years, but its future is now uncertain due to expectations of accelerated rate hikes by the Bank of Japan.

The strategy involves borrowing yen at a low cost and using it to buy currencies with better yields, such as U.S. dollars or Mexican pesos.

The annualised returns from dollar-yen carry trades are typically around 2.5 per cent to 3.5 per cent, which is lower than the 5 per cent to 6 per cent seen in 2024.

Following yen-buying intervention by Tokyo and Washington at the end of July, investors appear to be switching to the Swiss franc as a funding vehicle.