The yen carry trade: how to spot a build-up and an unwind
Updated 2026-09-27
For decades, near-zero Japanese interest rates made the yen the world's cheapest currency to borrow. When the trades built on that borrowing are closed in a hurry, the yen jumps and whatever the borrowed money bought gets sold, often far from Japan.
What is the yen carry trade?
A carry trade borrows in a low-interest currency and invests in higher-yielding assets: US Treasuries, other currencies, stocks. The profit is the interest-rate gap, as long as the yen doesn't rise. Because the trade is usually leveraged, a rising yen or a narrowing rate gap can force many holders to sell at once.
What happens in a yen carry trade unwind?
Borrowers buy back yen to repay their loans, pushing the yen sharply higher, and sell the assets they bought. Japanese stocks fall as a stronger yen hits exporters. Major unwinds came in October 1998 (alongside the collapse of the hedge fund LTCM), August 2007, October 2008 and August 2024.
Warning signs
The monitor splits its measures into two groups. Carry-trade fuel: what the trade earns and how crowded it is. Crowded positioning is the early warning: it was red a month before the 2007 and 2024 unwinds. Unwind under way: a sharp yen rally, rising yen volatility, speculators buying back short-yen bets and a falling Nikkei.
Carry-trade fuel: the indicators and their warning levels
| US 2Y – Japan rate gap | What the carry trade earns: the US 2-year yield minus Japan's overnight rate. A narrowing gap (Fed cuts, Bank of Japan hikes) makes carry trades less profitable and can trigger an unwind. Narrowing over 6 months: yellow ≥ 75 bp, orange ≥ 125, red ≥ 200 (1998: −149, 2007: −279, 2024: −131). Japan's rate is a monthly average, so this lags by a month or so. |
|---|---|
| Speculative yen positioning | How crowded the trade is: speculators' net yen futures position (CFTC, % of open interest; negative = net short yen, i.e. funding carry trades). Median since 1986: −13%. Yellow ≤ −30%, orange ≤ −40%, red ≤ −50% (Jul 2007: −53%, Jul 2024: −51%). Weekly. |
Unwind under way: the indicators and their warning levels
| USD/JPY | Yen per dollar; a sharp fall is the yen rallying as carry trades are closed. Fall over 1 month: yellow ≥ 4%, orange ≥ 6%, red ≥ 9% (Oct 1998: −16%, Oct 2008: −13%, Aug 2024: −10%). |
|---|---|
| Yen volatility | Annualized volatility of USD/JPY over the last month (median since 1971: ~9%). Carry trades need a calm currency, so rising volatility forces them to shrink: yellow ≥ 12%, orange ≥ 15%, red ≥ 20% (1998: 32%, 2008: 33%, Aug 2024: 17%). |
| Yen short covering | Speculators buying back short-yen positions: the rise in their net position over 1 month, in points of open interest. Yellow ≥ +20, orange ≥ +30, red ≥ +45 (1998: +42, 2008: +32, Aug 2024: +57). Weekly. |
| Nikkei 225 | Japanese stocks fall hard in an unwind, as a stronger yen hits exporters and leveraged positions are sold. Fall over 1 month: yellow ≥ 7%, orange ≥ 10%, red ≥ 15% (Oct 2008: −40%, Aug 2024: −23%). |
Data sources
FRED: the US 2-year Treasury yield (DGS2), Japan's overnight call rate (IRSTCI01JPM156N), yen per dollar (DEXJPUS) and the Nikkei 225 (NIKKEI225). Speculative positioning comes from the CFTC's Commitments of Traders report for CME yen futures: non-commercial longs minus shorts as a share of open interest, weekly since 1986.
How it feeds the daily answers
The rate gap, USD/JPY, yen volatility, short covering and the Nikkei form the yen carry theme of momentum. Positioning is left out there, because it "improves" as speculators close their short-yen bets, which is the unwind itself. See the methodology.
The free members' yen carry trade dashboard shows every measure above with its current value, direction, signal and chart, plus replays of past crises and CSV downloads. See today's combined reading on the home page.