Yen's Sharp Rally Threatens Carry Trade Ahead of BOJ Rate Decision

The Japanese yen has seen a sharp rally ahead of an expected Bank of Japan interest rate hike next week, disrupting the long-established carry trade. The yen's surge is encouraging investors to unwind their positions in currencies and assets that offer higher returns.

Cross-border yen borrowing 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.

The scale of the yen carry trade is difficult to determine, but analysts have pointed to data suggesting that substantial amounts of capital remain tied up in the strategy. A rapid unwinding could create volatility across global financial markets, as happened during the sharp market turmoil in August 2024.