The yen is appreciating rapidly, increasing the risk that carry trades, which involve borrowing low-interest yen to invest in higher-yielding assets, will unwind. Ahead of the Bank of Japan meeting, this article examines market developments and potential impacts.
The yen appreciated rapidly and entered an upward trend ahead of the Bank of Japan's monetary policy meeting. Investors were forced to reassess their carry trades, and short yen positions were reduced, although the overall scale of those positions is still considered substantial. A carry trade involves borrowing low-cost yen and shifting the funds into higher-yielding assets, making it highly sensitive not only to interest-rate differentials but also to currency movements.
Based on data from the Bank for International Settlements (BIS) and other sources, yen-denominated borrowing reached a record ¥360 trillion as of March, reflecting the global scale of the positions. The simultaneous unwinding of these accumulated positions could have significant spillover effects on global markets. Market participants say expectations of monetary easing and fiscal stimulus in Japan have fueled excessive carry trades.
On 8 September, the yen rose to ¥152.89 per US dollar, recently reaching its highest level since February. Markets are increasingly pricing in the possibility that the Bank of Japan will raise interest rates, while speculation is also mounting over whether foreign-exchange intervention will continue. Reports have also raised concerns about sharp market movements driven by yen buying to close short positions and the triggering of stop-loss orders.
Ahead of the upcoming Bank of Japan and Federal Reserve meetings, markets are anticipating a phase in which short yen positions are further unwound. However, the Bank of Japan's longer-term hawkish stance and the possibility of a policy change remain uncertain, and some market participants argue that the carry-trade strategy is no longer a "free lunch".