Investors in the United States and Japan are watching the yen’s sudden surge with growing unease. The currency, which fell to 40‑year lows in July, has rallied to its strongest level since February at 152.89 per dollar, spurred by expectations of a 25‑basis‑point rate hike by the Bank of Japan (BOJ) next week.
Carry‑trade unwind gains momentum
The classic carry trade—borrowing yen at low rates to invest in higher‑yielding assets—is now being unwound. Analysts note that cross‑border yen borrowing, a proxy for the trade, hit a record 360 trillion yen ($2.35 trillion) in March, the largest buildup in three decades.
“The carry trade is vulnerable because this unwind is happening before the BOJ has even delivered its expected hike,” said Charu Chanana, chief investment strategist at Saxo. “Further yen strength could turn a gradual reduction in leverage into a much faster, self‑reinforcing unwind.”
Market reactions and intervention risk
Traders report that short‑yen positions are already being trimmed. Masahiko Loo, senior fixed‑income strategist at State Street Investment Management in Tokyo, said the break below 155 triggered additional short covering by both leveraged funds and real‑money investors.
Analysts warn that a continued unwind could push the USD/JPY pair toward the mid‑140s, especially as investors price in a more hawkish BOJ path. The move also raises the specter of another joint U.S.–Japan intervention, similar to the one that halted the yen’s decline in July.
What the odds say
Tokyo Tanshi data shows a 97% probability that the BOJ will raise its key rate by 25 basis points to 1.25%, up from 52% a month ago. The market also sees a 27% chance of a rate increase in October and a 61% chance in December.
While the 2024 yen rally caught many off guard, analysts believe investors have learned from that episode. “Money no longer has to leave Japan to earn a return,” said Kenneth Goh, director of private wealth management at UOB Kay Hian, noting that 10‑year Japanese government bond yields are near a 30‑year high.
Outlook
For now, traders are proceeding cautiously, aware that the upcoming BOJ meeting could dictate the yen’s trajectory and the future of the carry trade. As State Street’s Loo put it, “The carry trade still works, but it is no longer a free lunch. It now comes with a political risk premium.”
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
