Yen carry trade risks mount
Hedge funds and other leveraged investors face renewed risks from the yen carry trade as Japan moves further away from decades of ultra-loose monetary policy, raising concerns that a reversal of yen-funded positions could reverberate across global markets, according to a report by the Financial Times.
Hedge funds and other leveraged investors are facing heightened risks due to the yen carry trade as Japan's monetary policy shifts away from decades of ultra-looseness. The Financial Times reports that a reversal of yen-funded positions could shake global markets. While the exact magnitude of this activity is hard to gauge due to its complex nature involving derivatives and other unregulated structures, estimates show that yen-funded borrowing among hedge funds, banks, companies, and households has surged.
Jefferies analyst Shrikant Kale estimates a 67% increase in cross-border yen borrowing to roughly JPY360tn ($2.3tn) between 2021 and 2026, marking the largest such cycle in three decades. The strategy entails borrowing yen at low interest rates and investing in assets yielding more. However, the strategy risks unraveling if the yen appreciates or Japanese rates surge sharply, forcing investors to sell assets purchased with yen leverage and repurchase the Japanese currency.
Such volatility was evident in 2024 when a stronger yen and altered expectations for Bank of Japan policy triggered a rapid deleveraging across global markets, impacting Japanese equities, tech stocks, cryptocurrencies, and emerging-market currencies. The Bank for International Settlements found markets highly sensitive to shifts in growth and policy expectations.
Current concerns are heightened by the possibility that this cycle could be even larger. Recent data shows speculative short positions in the yen have returned, with only a recent reversal in trend. Beyond hedge fund activity, analysts highlight Japanese corporations as significant contributors to yen-funded overseas investments.
They've amassed vast foreign assets during years of low domestic borrowing costs and a strong US dollar. Japanese companies held JPY384tn in foreign direct investment in 2025, exceeding half of Japan's GDP, with Citi estimating non-financial Japanese firms now possess more overseas assets than banks, pension funds, and insurers combined.
Written by urgent.news from Hedgeweek's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
