What is Yen carry trade unwind?
by D.X.
2025-04-02 15:32:00
Concept and Structure of the Yen Carry Trade
The yen carry trade refers to a strategy where funds are borrowed in low-interest currencies like the Japanese yen and converted into higher-yielding currencies to invest in assets in those countries. Investors profit from the interest rate differential (carry) between borrowing and investing. The Japanese yen has long been used for carry trades due to its persistent low interest rates.
- Carry trade: A strategy of borrowing in low-interest currencies and investing in high-yield assets
- Yen carry trade: A carry trade using the Japanese yen
- Profit mechanism: Maintains interest rate spread; potential forex gains if the yen weakens
Meaning and Causes of Yen Carry Trade Unwinding
The unwinding of a yen carry trade refers to closing out yen-based carry trade positions, where investors sell the assets they previously purchased and convert the proceeds back into yen to repay their loans.
Main triggers:
- Shrinking interest rate differentials (e.g. U.S. rate cuts or Japan rate hikes)
- Forex loss concerns due to yen appreciation
- Rising global risk-off sentiment
Consequences:
- Rapid selloffs in overseas stock and bond markets
- Sudden yen appreciation
- Greater volatility across global financial markets
Recent “Yen Carry Unwind Crisis” Case Studies (2024–2025)
August 2024: The ‘Black Monday’ Triggered by Carry Trade Unwinding
- BOJ signaled tightening, yen surged (USD/JPY from 162 to 148)
- Global stock markets plunged (KOSPI -8.8%, S&P500 approx. -8%)
- Massive yen buying caused temporary liquidation of carry trades
Late 2024: Renewed Concerns Over Carry Unwinding
- Japan’s rising inflation drove expectations of more rate hikes
- South Korea and other emerging markets saw weakening equities and rising foreign outflows
January 2025: BOJ Rate Hike and Risk of Further Unwinding
- BOJ raised its policy rate to 0.5%
- As much as $227 billion in remaining carry capital potentially at risk of being unwound
- Market volatility increased
February 2025: Inflation Pressures in Japan Heighten Carry Unwinding Fears
- Japan’s core CPI surged 3.2% YoY
- USD/JPY fell below the 150 level, shaking crypto markets
- Renewed fears of global volatility due to BOJ tightening
Impact of Carry Unwinding on Global Financial Markets
- Exchange rate volatility: Rapid yen movement disrupts currency markets
- Equity market shock: Global stock selloffs and deteriorating investor sentiment
- Bond and rate impact: Government bond yields rise, emerging markets face capital outflows
- Crypto spillover: Increased volatility in crypto markets due to carry trade unwinding
- Capital flow reversal: Capital returns to Japan, draining liquidity from emerging economies
| Period & Trigger | Estimated Unwind Scale | Major Market Impact |
|---|---|---|
| 2008 Global Financial Crisis | ~$400 billion | Global market crash, yen surge |
| 2020 COVID-19 Shock | ~$500 billion | Risk asset selloff, yen and USD both appreciated |
| Aug 2024 BOJ Tightening | 200K yen futures contracts | KOSPI -8.8%, U.S. & EU indices fell, crypto market tumbled |
| Jan 2025 BOJ Rate Hike | Up to $227 billion | Yen spiked, emerging market capital outflow risk heightened |
| Feb 2025 Inflation Pressure | (Projected) | Continued yen strength, crypto market volatility increased |
Summary
The unwinding of the yen carry trade has wide-reaching effects on global markets through currency and interest rate channels. The BOJ's policy direction is a key factor in determining the sustainability of carry trades. Given the massive scale of yen carry capital, investors and policymakers alike must remain vigilant, strengthen risk management, and enhance international coordination frameworks.
