A yen carry trade borrows or otherwise takes a position in low-cost yen, converts or exposes that money to another currency, and invests in assets expected to earn more. The interest-rate gap can generate a return, but it is not guaranteed profit: if the yen strengthens enough before the position is closed, the exchange-rate loss can wipe out the yield advantage.
How does a yen carry trade work?
In a conventional carry trade, an investor funds a position in a lower-interest-rate currency and invests in a higher-yielding currency or assets denominated in it. For a yen carry trade, the yen is the funding currency. An investor might borrow yen, exchange it for dollars, and place the dollars in an interest-bearing investment. Currency futures or forwards can create similar exposures without following the same cash-borrowing and conversion steps; their pricing, financing, and risks differ. The Bank of Korea outlines these approaches in its September 24, 2024 explainer.
A simplified example
The Bank of Korea illustrates the mechanics using assumed figures: borrow yen at 0%, exchange at ¥160 per US dollar, and invest in a US deposit yielding 5%. If the exchange rate is unchanged at maturity, the interest differential produces the assumed gain. If the rate moves to ¥152 per dollar, the source says the exchange-rate loss erases that 5% gain. These are illustrative assumptions, not current market quotes or a forecast.
The realized result depends on more than the two interest rates. It also depends on the exchange rate when foreign proceeds are converted back to yen, the investment’s own return, borrowing and transaction costs, and—for derivatives—the relevant pricing, financing, and margin terms. The Bank of Japan likewise describes carry profitability as dependent on both interest differentials and currency movements in its April 2025 Financial System Report.
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What are the potential advantages?
- Potential yield pickup: If the interest-rate differential persists and other costs and currency moves do not overwhelm it, the investment may earn more than the yen funding costs.
- Possible benefit from yen depreciation: If the yen weakens against the investment currency, foreign-currency proceeds may be worth more when converted back into yen.
- More than one way to take exposure: Futures and forwards can provide currency exposure without the same operational steps as borrowing yen and exchanging cash. They have their own pricing and risk characteristics, so they are not interchangeable with an unhedged cash-funded trade.
What are the risks and disadvantages?
- Exchange-rate reversal: Yen appreciation makes foreign-currency proceeds worth less in yen and raises the yen cost of repaying borrowing. A sufficiently large move can erase the yield advantage.
- The rate gap can narrow: A rise in Japanese rates or a fall in the foreign investment rate can reduce the potential carry. In April 2025, the Bank of Japan reported that the carry-to-risk ratio had declined mainly as the Japan–US interest differential fell and implied USD/JPY volatility rose. That describes the period in the report, not a live reading.
- Leverage can magnify losses: Borrowing or derivatives can create a position larger than the investor’s equity. Margin increases or falling collateral values may force a rapid close, turning a market move into a forced sale.
- Exit timing matters: A trade can collect a yield differential over time and still lose money if the exchange rate moves sharply before the investor exits. The eventual conversion rate is uncertain.
- Exposure is hard to measure: Borrowing and derivatives statistics do not reliably reveal the final use of funds or capture every position, so broad yen-denominated totals are not equivalent to carry-trade exposure.
What happened during the August 2024 unwind?
The Bank for International Settlements (BIS) reported that early-August market volatility was initially associated with a negative US macroeconomic release and was amplified by the unwinding of leveraged positions in equity and currency markets. The BIS described currency carry trades unwinding amid changed interest-rate expectations and higher volatility; the yen, then the predominant funding currency, appreciated sharply but briefly, while some investment currencies depreciated. The BIS also noted that these FX moves were large but not outsize compared with earlier carry-trade crashes, and that emerging-market economies weathered the volatility relatively well.
The BIS characterized the event as “yet another example of volatility exacerbated by procyclical deleveraging and margin increases,” in the authors’ BIS Bulletin 90. This sequence does not establish that carry-trade unwinding alone caused the wider market sell-off.
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In its analysis of the period, the Bank of Japan reported that speculative net-short yen futures positions reached a record high in early July 2024 and were subsequently unwound. Its April 2025 report linked a falling carry-to-risk ratio to a smaller Japan–US three-month interest differential and higher implied dollar–yen volatility. These are historical findings about that episode, not current positioning or a current risk measure.
How large is the yen carry trade?
There is no precise total established by the available BIS data. For the period leading into the August 2024 event, the BIS gave a rough middle estimate of ¥40 trillion ($250 billion) for FX carry trades, while warning that the figure was difficult to measure and likely biased downward because of data gaps. It is an event-period estimate, not a current market total.
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Other BIS figures describe broader banking exposures and should not be relabeled as carry trades. In Q1 2024, banks’ yen-denominated claims on non-banks outside Japan were $880 billion, or ¥133 trillion. Those claims included loans, securities, and derivatives. A separate figure for yen-denominated loans to non-banks outside Japan was $271 billion (¥41 trillion). Neither figure identifies how much borrowing was used for a carry trade. The BIS explains these limitations in its September 2024 statistical analysis.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How can monetary policy affect carry trades?
A change in policy expectations can alter both sides of the trade: it may change the interest-rate differential and move exchange rates. A BIS bulletin published May 6, 2026 says accumulated leveraged carry positions can amplify the effect of policy tightening when investors unwind them. Its authors summarize the general mechanism this way: “Significant short positions of carry traders in funding currencies amplify the impact of policy tightening.” This is not a quantified forecast for yen markets or a current estimate of yen positions; see BIS Bulletin 124.
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