The Bank of Japan raised interest rates in September as expected, but the move was less forceful than the market had feared. That gave investors a brief pause after a period in which a fast rise in the yen and a string of hawkish signals from BOJ officials had revived memories of the 2024 carry trade reversal, when global assets were sold across the board.
This time, the BOJ did not come across as hawkish as many had expected. Governor Kazuo Ueda said at the post-meeting press conference that he would not rule out back-to-back rate hikes, but he left the pace of future tightening open. The outside backdrop also lacked an obvious negative shock: U.S. August nonfarm payrolls were steady and oil prices moved lower. With those factors in place, the rate hike had only a limited impact on global markets. Asia-Pacific equities rose broadly, and the yen weakened further after the decision.
Near-term risk of a concentrated unwind has eased
Concern in the market has not disappeared. As the BOJ continues its rate-hike cycle, yen funding costs will rise and the currency’s appeal as a global funding vehicle for carry trades will keep fading. Even so, the article argues that the risk of a concentrated unwind in the near term has already declined. Capital is more likely to return gradually, with spillover effects still manageable.
At its core, the yen carry trade rests on three linked parts: funding, foreign exchange, and asset allocation. On the funding side, investors borrow low-yielding yen, with the cost set by BOJ policy rates. On the FX side, they convert those borrowed yen into dollars, so exchange-rate swings directly affect principal through translation gains or losses. On the asset side, they deploy dollars into higher-yielding assets such as U.S. Treasuries and U.S. equities to capture yield differentials and capital gains.
Three conditions usually need to align for a disorderly reversal
According to the article, a large-scale, stampede-like reversal in carry trades usually requires three conditions to hit at the same time: continued BOJ tightening that pushes up yen funding costs, a rapid and sharp appreciation in the yen that creates FX losses, and falling prices for dollar assets that compress returns.
Right now, all three channels have changed at the margin, but the trigger for a full-scale forced unwind has not yet formed.
Funding: the BOJ has started hiking, but the stance is still cautious
On the funding side, the BOJ has begun raising rates, but its overall stance remains cautious and is unlikely to drive yen funding rates sharply higher in a short period. The article says domestic economic constraints and fiscal constraints in Japan are issues the central bank cannot avoid, leaving little basis for rapid and aggressive tightening. It says that point is even more obvious in Japan than in the United States.
The core return on a carry position still comes from the U.S.-Japan rate differential. While the yen is becoming less attractive as a funding currency, that spread remains wide. The 10-year differential is still around 200 bp, which means the profit space for carry trades is unlikely to be eroded quickly in the near term. Traders still have time to adjust leverage and reduce positions gradually, making a concentrated wave of forced liquidation less likely.
FX: the speed of yen appreciation matters more than the level alone
On the currency side, the article says the key variable is not just where the yen trades, but how fast it gets there. Only a sharp rise over a short period can quickly generate mark-to-market FX losses and force traders to close positions at the same time. If the yen strengthens slowly, the market usually has enough time to adjust, which makes a stampede less likely.
The pace of yen appreciation has already slowed. One reason is that the BOJ, constrained by domestic fundamentals, may not move very quickly on rates. Another is that this round of BOJ tightening is interacting with the Federal Reserve’s policy cycle, which to some extent limits how much the U.S.-Japan rate spread can narrow and restrains the yen’s momentum for a one-way, rapid rise.
Assets: the main question is whether risk assets start to roll over
The asset side depends on global risk appetite and the return profile of dollar assets. Carry capital ultimately flows into U.S. Treasuries, U.S. equities, and other dollar-denominated assets. That is where the trade earns its return. If U.S. stocks correct sharply and Treasury yields fall quickly, returns on the asset side shrink or even turn negative. Add rising yen funding costs and FX losses from a stronger yen, and those three pressures together can set off large-scale position unwinds.
For now, higher-yielding dollar assets such as U.S. equities are still showing resilience. The macro backdrop and AI end-demand have not shown signs of systemic deterioration, so returns on the asset side are still covering yen funding and FX costs. In that setting, there is no strong catalyst pushing capital to exit all at once.
Current conditions do not look like a replay of 2024
Based on those factors, the article says the current setup is different from the one that produced the violent carry unwind in 2024. The BOJ’s pace remains cautious, the yen lacks a clear basis for a one-way surge, and there is no sign yet of a systemic drop in overseas assets. That makes a repeat of the earlier shock harder to see in the short run.
Another change is positioning. Crowding in yen depreciation trades has already fallen noticeably. Since the joint U.S.-Japan intervention, yen shorts have been covered in a visible way. As of the week of Sept. 15, CME non-commercial yen short positions were down about 56% from the late-July peak, while long positions had surged 135%. Net long positioning also moved out of negative territory in September. With part of the short covering already done, the article says the risk of another rapid round of covering that forces a concentrated carry unwind is relatively controllable.
What the market needs to watch next
The article says the risk of a concentrated reversal in carry trades should be tracked through two immediate variables: whether the BOJ accelerates the pace and size of rate hikes beyond expectations, and how fast the yen appreciates over a short period.
Still, the most important variable is on the asset side. The piece argues that asset risk is the single most important catalyst for a concentrated carry unwind.
It points back to the 2024 reversal as evidence. At that time, the market was also dealing with a sharp rise in the yen and the start of BOJ tightening. But the final blow to carry positions came from the asset side, when global risk assets corrected. In the earlier phase of 2024, rising yen rates and yen appreciation on their own only led to a gradual adjustment in positions. In August, however, a rise in the U.S. unemployment rate triggered the Sahm Rule and lifted recession expectations, which then led to a systemic sell-off in global assets and accelerated both the concentrated unwind in carry trades and the yen’s appreciation.
Tail risks in U.S. assets remain the main concern
For that reason, the article says the bigger risk ahead is a tail event in U.S. assets that could speed up the reversal of carry trades. The factors it highlights include a U.S. economy that weakens more than expected, escalating geopolitical conflict, wider disagreement inside the AI sector, and sharp volatility in the U.S. Treasury market. Any of those could raise the risk of concentrated carry trade liquidations in the short term.