Explainer-What is the yen carry trade?

The yen carry trade involves borrowing the yen, typically at a low interest rate, and investing the funds in higher-yielding currencies like the U.S. dollar or emerging market currencies. This strategy became popular in 2013 under Prime Minister Shinzo Abe's policies. The trade grew substantially in 2022 and 2023 as the U.S. Federal Reserve raised interest rates and the yen weakened.

The size of the carry trade is difficult to determine precisely, but cross-border yen borrowing reached a record 360 trillion yen as of March. Net short positions on the yen have also increased, though they remain lower than their two-year peak. Unlike the sharp yen appreciation in July 2024, the current situation appears more orderly, with investors adjusting to the expected rate hikes by the Bank of Japan.