The Japanese yen has jumped to its strongest level since February, forcing traders to unwind the long-established carry trade just as the Bank of Japan prepares for an expected rate hike next week. Cross-border yen borrowing hit a record $2.35 trillion in March, and one strategist warns a further squeeze could push USD/JPY toward the mid-140s.
Carry trade unwind accelerates
The yen firmed to 152.89 per dollar on Tuesday, its strongest level since February and a sharp reversal from around 160 less than a week earlier. The rally is unwinding the popular carry trade, in which investors borrow yen cheaply to fund purchases of higher-yielding currencies and assets.
Cross-border yen borrowing, a proxy for the carry trade, ballooned to a record 360 trillion yen ($2.35 trillion) as of March, according to a Jefferies analysis of Bank for International Settlements data — the largest carry-trade build-up of the past three decades. Charu Chanana, chief investment strategist at Saxo, said the unwind is happening before the BOJ has even delivered its expected hike, so positioning that still looks sizeable could turn into a faster, self-reinforcing move.
Yen gains broaden as volatility spikes
The move was broad-based: the yen climbed almost 5% in September against the Mexican peso and the Turkish lira, two currencies popular in carry trades. Three-month implied volatility for dollar/yen has jumped to its highest level in six months, posting its biggest week-on-week jump in two years.
Masahiko Loo, senior fixed-income strategist at State Street Investment Management, said investors are pricing a more hawkish BOJ path. According to Reuters: "A further unwind could push USD/JPY toward the mid-140s given the sizeable outstanding short position."
Odds of a BOJ hike jump to 97%
Traders now put the odds of a BOJ interest rate hike of 25 basis points to 1.25% at 97%, up from 52% a month earlier, according to Tokyo Tanshi data. The same data shows a 27% chance of an additional increase in October and 61% odds in December, with the decision due at the BOJ's September 17-18 meeting.
Analysts say the setup differs from August 2024, when a BOJ hike sent the yen sharply higher and forced a disorderly unwind that rattled global markets for days. Kenneth Goh, UOB Kay Hian's director of private wealth management, said money no longer has to leave Japan to earn a return, pointing to the 10-year Japanese government bond yield hovering near its highest point in 30 years. Whether the current move marks a lasting turn, he said, will be answered only after the BOJ's September 18 decision.
Sources: Reuters, Economy News
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