appConfigEntityId

bodyType

customContents

entityId

entityUuid

isVideo

articlePageQuery

article

articleSchemaContent

content

hooksArticlePageAdvertisementConfigArticle

hooksArticlePageFloatingButtonConfigArticle

appConfig

filter

json

liveArticle

Xinyi Wu

The Japanese yen has climbed from multi-decade lows, driven by shifting policy expectations and returning domestic capital, putting the yen carry trade – a popular global investment strategy – back in the spotlight and raising questions about its long-term viability.
Having strengthened by more than 3 per cent since the start of the month to about 153.5 against the US dollar, the currency is trading near a seven-month high and above levels reached after a rare joint US-Japan market intervention in July.
Matteo Giovannini, senior finance manager at Industrial and Commercial Bank of China, attributed the strengthening to a mix of factors: the possibility of a narrowing US-Japan yield gap, some scaling back of short-yen positions and growing expectations of a Bank of Japan (BOJ) rate hike.
“A stronger yen and greater expectations of BOJ tightening make the carry trade less attractive because the cost of funding positions in yen is rising while the risk of exchange-rate losses increases,” Giovannini said.
Markets have priced in a 0.25 percentage point rate hike at next week’s BOJ meeting, which would lift Japan’s benchmark interest rate to 1.25 per cent – its highest level since 1995.
That could help narrow Japan’s wide interest rate gap with the United States, which has historically fuelled the yen carry trade by allowing investors to borrow cheaply in yen to finance investments in higher-yielding assets overseas.
While Giovannini expects investors to reduce their leverage and exercise more caution, he said the trade was unlikely to disappear as long as a significant yield gap remained between Japan and other major economies.
Carlos Casanova, a senior economist at Union Bancaire Privee, noted that while the carry trade’s risk-reward profile had worsened, it was still supported by a US-Japan policy rate gap of about 2.75 percentage points.




“Expectations of further Fed [US Federal Reserve] tightening mean that this differential is not expected to narrow materially in the immediate term, which should allow the yen carry trade to remain broadly intact,” Casanova said.
Although the Fed was previously expected to hold rates steady for the rest of the year, persistent inflation data has increased the likelihood of a rate hike at its meeting next week.
But risks to the carry trade, Casanova warned, could emerge if markets began anticipating a faster pace of BOJ tightening relative to the Fed over the coming year. Investors, he noted, were currently interpreting the BOJ’s forward guidance as increasingly hawkish, pricing in an additional 0.75 to 1 percentage point tightening over the next six months and a terminal policy rate of about 2 per cent.
“For now, however, this remains a market expectation rather than an explicit signal from the Monetary Policy Board,” Casanova said, expressing scepticism over aggressive market assumptions and noting that coming central bank meetings would provide greater clarity.
Competition for capital is already intensifying among major Japanese institutional investors. Tang Yuxuan, head of Asia rates and FX strategy at JP Morgan Private Bank, noted that institutional repatriation – the return of capital to home markets – had also helped drive the yen’s recent rally.
“Higher domestic yields and increasing urges from policymakers are improving the incentives for large foreign asset holders to rebalance towards domestic assets,” Tang said, citing movements by major investors including Japan’s US$1.8 trillion Government Pension Investment Fund.
In a note published on Tuesday, Tang added that returning domestic capital could offer a more sustainable source of support for the yen than repeated, direct market interventions by authorities. But she said such allocation shifts were likely to be gradual, serving to stabilise the yen rather than drive a lasting rally against the US dollar.
“Durable FX market stabilisation ultimately requires the BOJ to meaningfully accelerate rate hikes,” she said.


Mainland China’s stock exchanges mount charm offensive amid Hong Kong IPO boom

For China’s hi-tech IPOs, it’s Hong Kong vs the mainland – but how much does it matter?

Betting on People-First Banking

Will fresh incentives give China’s housing market more than a short-lived rebound?

Banking & finance

Is the yen carry trade starting to unravel as Japan’s currency strengthens?

A passerby walks in front of a monitor showing the foreign exchange rate between the US dollar and the Japanese yen in Tokyo. Photo: EPA

Why the historic US-Japan intervention has failed to lift pressure on the yen

A man walks past an electronic screen displaying the current Japanese yen exchange rate on August 3, after a rare joint US-Japan intervention to prop up the currency. Photo: Reuters

US Treasury yield hits 19-year high, Japanese yen strengthens: the numbers moving markets

US Treasury Secretary Scott Bessent in Texas on Wednesday. Photo: AFP

Record China-US gap in bond yields unlikely to trigger capital flight: Marsh Investment

The widening yield spread between Chinese and American government bonds is unlikely to trigger capital flight from China. Photo: AFP

The spread between benchmark 10-year US Treasury bonds and equivalent Chinese sovereign bonds hit a record 3.17 percentage points this week. Photo: Reuters

Hong Kong stocks face double threat: US inflation and yen carry-trade risks

A giant electronic monitor shows the Hang Seng Index in Central, Hong Kong. Photo: Edmond So

US Treasury’s Bessent calls on Japan to boost yen through rate increases

People walk past a foreign currency indicator board showing the rate of the US dollar against the Japanese yen in Tokyo on August 3. Photo: EPA

A man shops at a grocery store in Tokyo’s Okubo district on August 23. Photo: AFP

A notepad in front of US Secretary of the Treasury Scott Bessent reads “To Do Buy Japanese Yen $5-10 bil” as he takes part in a cabinet meeting at Camp David on July 31. Photo: Reuters

Economy

Global Economy

The trade relies on borrowing cheap yen to invest in higher-returning assets overseas, but analysts say the strategy faces mounting pressure


The trade relies on borrowing cheap yen to invest in higher-returning assets overseas, but analysts say the strategy faces mounting pressure.


Is the yen carry trade starting to unravel as Japan’s currency strengthens?

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}The trade relies on borrowing cheap yen to invest in higher-returning assets overseas, but analysts say the strategy faces mounting pressure

The trade relies on borrowing cheap yen to invest in higher-returning assets overseas, but analysts say the strategy faces mounting pressure