Japan's steep yield curve opens 'reverse carry' trade opportunity, Eastspring says

Japanese bond yields are on the rise, creating an opportunity for overseas investors to engage in a reverse carry trade, according to Eastspring Investments. As Bank of Japan interest rates are being increased, the conventional yen-funded carry trade is becoming less appealing. This shift could lead to Japan's own bonds becoming more attractive for investment.

Eastspring's fixed income portfolio manager, Rong Ren Goh, explained that buying long-term Japanese government bonds and hedging against yen exposure could result in yields that are 100 to 200 basis points higher than comparable bonds in the investor's home market. The traditional yen-funded carry trade has lost its appeal as investors anticipate that Japan's policy rate will reach around 2% from its current 1.25%.

The net yen long position has also reached its highest level since July 2025, indicating growing confidence in the stabilization of Japanese bond prices following a selloff that started in 2022.