Yen Carry Trade Under Pressure as Currency Surge Raises Unwind Fears

The yen carry trade is under pressure as investors reassess its future following Japan's currency surge to a seven-month high. A stronger yen and expectations of tighter monetary policy are raising questions about whether the long-running strategy is approaching a turning point.

According to Reuters, annualised returns on dollar-yen carry trades are currently around 2.5% to 3.5%, based largely on the interest-rate gap between the United States and Japan. This compares with roughly 5% to 6% in 2024, when the interest-rate differential was considerably wider.

The yen's appreciation has prompted investors to unwind their positions, which can have consequences well beyond the foreign-exchange market. A rapid reversal of yen-funded positions can create sharp moves across currencies, bonds, and equities.

While there are currently fewer signs of a disorderly unwind of the scale seen in 2024, global markets remain on high alert for any sudden changes in the yen's value.