January 11, 2026 | What is the Yen Carry Trade?

The Yen carry trade is when big investors borrow money in Japanese Yen (because Japan has very low interest rates), then convert that money into US dollars and invest it in things that pay much higher returns, like:

• US government bonds

• Stocks (especially big US tech stocks)

• Emerging-market bonds and currencies

They make money from the gap between Japan’s low rates and America’s higher rates — plus any currency gains if the yen gets weaker.

A Simple Example

Imagine a hedge fund:

1. Borrows ¥100 million in Japan at about 0% interest

2. Converts it to about $650,000 USD

3. Invests it in US bonds earning 4–5%

That 4–5% difference is their profit.
If the Yen stays weak or falls, they make even more.

Because this looks so safe, many funds borrow 5–10 times more using leverage — which makes profits bigger… and so are losses.

Why It Works So Well (When It Does)

The trade works best when:

• Japan keeps rates near zero

• US rates stay high

• The Yen stays weak

That combination lets investors quietly collect profits for months or years.

Why It Can Suddenly Blow Up

The problem is that investors must repay their loans in Yen.

Two things can cause disaster:

1) Japan raises rates

If Japanese rates rise, borrowing Yen becomes more expensive.

2) The Yen gets stronger

If the Yen suddenly rises, investors need more dollars to buy yen to repay their loans — meaning they take losses.

What Happens During a “Carry Trade Unwind”

When the Yen jumps:

• Investors rush to sell stocks and bonds

• They convert dollars back into Yen to repay loans

• Falling asset prices trigger margin calls

• More forced selling follows

• Markets around the world drop

This is how a currency move in Japan can cause stock market crashes in the US and elsewhere.

A Real Example: 2024

In 2024:

• Japan started raising interest rates

• The US hinted at rate cuts

• The Yen jumped about 15% in weeks

That caused a massive sell-off in global stocks and bonds as the carry trade was unwound.

Where Things Stand Now (Early 2026)

The interest rate gap between the US and Japan is much smaller than it was in 2022–2023, so the Yen carry trade is less attractive right now.

But if that gap widens again, the trade — and its risks — can quickly come back.

Why Retail Investors Should Care

You may never trade the Yen — but big hedge funds do.

When the Yen suddenly moves, it can trigger:

• Stock market drops

• Bond sell-offs

• Tech stock crashes

• Global volatility

So when you hear about the Yen strengthening, it’s a warning sign for risk assets worldwide.

Martin Straith January 11th, 2026

Posted In: The Trend Letter

Next: The Bipolar Economy »