Japanese yen carry trade faces pressure amid rate hike expectations

The Japanese yen carry trade, a strategy where investors borrow yen at low interest rates to invest in higher-yielding assets, is facing increased pressure as the currency strengthens. The yen has risen more than 3% recently, trading near a seven-month high against the US dollar.

This shift is driven by expectations of a Bank of Japan (BOJ) interest rate hike, which markets have priced in at 0.25 percentage points. Such a move would bring Japan’s benchmark rate to 1.25%, its highest level since 1995, and narrow the yield gap between Japan and the United States.

A strengthening yen and rising interest rates make the carry trade less attractive by increasing funding costs and the risk of exchange-rate losses. While an unwind occurs when investors sell overseas assets to repay yen-denominated loans, analysts suggest the trade may persist as long as significant yield gaps remain between Japan and other major economies.