Yen Surge Upsets Carry Trade as BOJ Hike Looms Large

The Japanese yen has been surging in value ahead of an expected interest rate hike from the Bank of Japan, causing problems for investors who have built large positions on a carry trade. The carry trade involves borrowing the low-yielding yen at a low cost to invest in other currencies and assets offering higher yields.

According to analysts, cross-border yen borrowing has ballooned to a record 360 trillion yen ($2.35 trillion) as of March, making it the largest carry-trade build-up of the past three decades. This means that a significant amount of money is tied up in the trade and could jolt markets if unravelled suddenly.

Traders are now bracing for central bank meetings in Japan and the U.S., with many expecting the BOJ to raise its key rate by 25 basis points to 1.25%. The odds stand at 97% that this will happen, according to Tokyo Tanshi data.

Some analysts warn that the unwind of the carry trade could be disorderly and cause shockwaves across global markets, as it did in August 2024 when a BOJ rate hike sent the yen higher. However, others argue that investors have learned their lesson and are unlikely to be surprised this time around.