Yen Carry Trade Unwind Looms as BOJ Hikes Expectations

The yen's surge to its strongest level since February has investors concerned about another disorderly unwind of the massive yen carry trade. The currency traded around 153 per dollar in Tokyo on September 9, a decline of roughly 7% from the 163.86 peak reached on July 29.

The move reflects growing conviction that the Bank of Japan will accelerate its rate-hiking cycle, with the next policy decision due on September 17-18. Some market voices are even calling for a 50-basis-point increase, and expectations are building that a 25-basis-point hike next week could be followed by another before year-end.

The scale of the carry trade is difficult to pin down, but cross-border yen borrowing hit a record ¥360 trillion ($2.34 trillion) as of March, according to a Jefferies analysis of Bank for International Settlements data. Net short positions on the yen stood at 92,227 contracts in the week to September 1.