Yen Rally Sparks Carry Trade Uproar Ahead of BOJ Rate Decision

The yen's recent surge has disrupted the long-established carry trade, causing investors to reassess their outlook for the volatile currency. The Japanese yen has been rallying ahead of an expected Bank of Japan interest rate hike next week, prompting capital repatriation and expectations of a faster pace of monetary tightening.

The yen's strength is also encouraging investors to unwind carry trades before key monetary policy meetings in Japan and the United States. This strategy typically involves borrowing yen at low interest rates and investing in currencies and assets that offer higher returns.

Cross-border yen borrowing, a proxy for the carry trade, reached a record 360 trillion yen ($2.35 trillion) as of March, according to Jefferies analysis of Bank for International Settlements data. This represents the largest build-up of the trade in roughly three decades.