You don’t need to trade currencies for the yen carry trade to affect your portfolio. It’s a strategy used by hedge funds and institutional investors rather than everyday savers, but when it unwinds, the ripple effects have reached global stock markets more than once – most sharply in early August 2024, when a single Bank of Japan rate decision triggered one of the fastest global sell-offs in years. Understanding the mechanics helps explain why headlines about a Japanese interest rate can move markets you’re actually invested in.
What the yen carry trade actually is
The strategy is simple in outline: borrow money in Japanese yen, where interest rates have been low for decades, convert it into another currency, and invest the proceeds in higher-yielding assets elsewhere – US Treasury bonds, other government debt, or equities. If you can borrow yen at 0.5% and earn 3% on US bonds, the roughly 2.5% difference is profit, before any change in the exchange rate itself. Because the profit margin on each trade is often fairly thin, investors frequently use leverage to make the strategy worthwhile at scale, which is exactly what makes an unwind so disruptive when one happens.
Why it unwinds, and why it unwinds fast
The trade depends on two things staying roughly stable: the interest rate gap between Japan and wherever the money’s invested, and the yen’s exchange rate against the currency it was converted into. When the Bank of Japan raises rates, that gap narrows, the trade becomes less profitable, and the yen itself tends to strengthen – which erodes the trade’s returns further still, since the borrowed yen now costs more to repay. Because so many investors are running some version of the same trade at once, a shift that makes it less attractive can trigger a wave of simultaneous unwinding, as leveraged positions are closed out in a hurry rather than gradually. That’s what drove the August 2024 episode, and it’s the same mechanism that resurfaced through 2025 and 2026 as the Bank of Japan continued moving rates higher.
Where things stand now
The Bank of Japan has spent the past two years gradually unwinding its own decades-long ultra-low rate policy, moving from near zero toward roughly 1% by the summer of 2026, with markets watching closely for a further increase at its September 2026 meeting. Each step higher narrows the gap that makes the yen carry trade profitable in the first place, and each one carries some risk of triggering another round of unwinding, particularly if a move comes faster or larger than markets have priced in. Trying to predict the exact timing of the next unwind is a genuinely difficult call even for professional investors who watch it full-time. What’s more useful is simply recognising why a Japanese interest rate decision can show up as volatility in a well-diversified global portfolio.
What this means for your own portfolio
A properly diversified portfolio, built around your own time horizon and risk tolerance, is designed to absorb volatility from events like this without requiring you to predict them. The carry trade itself isn’t something most private investors hold directly, but its unwinding can move the same global markets your pension or investments sit in, which is exactly the kind of short-term noise a long-term plan is built to ride out.
Let’s make sure your portfolio can absorb it
We work with clients across Poole, Bournemouth and the wider Dorset area to build portfolios that don’t need calling correctly on every headline out of Tokyo or anywhere else. If you’d like a second opinion on how well diversified your own investments actually are, get in touch and we’re happy to have a no-obligation conversation.
This article is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only. All information is correct at the time of writing (September 2026) and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount invested. Past performance is not a reliable indicator of future performance.