Yen Carry Trade Unwind Looms as Japan's Bond Yields Hit 30-Year High

Japan's government bond yields have reached nearly 30-year highs, hitting 3% for the first time since September 1996. This milestone has sent shockwaves through global markets, particularly in regards to the potential unwinding of 'yen carry trades.'

The yen carry trade involves borrowing low-yielding yen and investing in higher-yielding assets. With Japan's 10-year government bond yield now above 3%, investors are facing a stark reality: their high-interest loans may become unsustainable.

U.S. Treasury Secretary Bessent has warned that disorderly moves in the yen market could trigger forced liquidations, roiling global markets and increasing borrowing costs for American households and businesses.

The Bank of Japan (BOJ) is expected to raise its policy rate by 25 basis points in September, a move that will further accelerate the unwinding of carry trades. Analysts at Capital Economics note that Japanese residents' outstanding loan balances to overseas borrowers have exceeded their 2024 peak, while loans from Tokyo branches of non-Japanese banks to their headquarters have reached their highest level since the global financial crisis.