Investors have been borrowing cheaply in Japan and betting elsewhere for years. Let me tell you why the exit could get ugly.
Let me let you in on a trade that’s quietly held up global markets for years — one almost nobody brings up at a dinner party unless they work in a hedge fund and want to clear the table. It doesn’t make headlines on a normal day. But when it unwinds — and at some point it always, always does — markets feel it everywhere at once. It’s called the Japanese yen carry trade. And in 2026, the warning bells are getting harder to ignore.
Here’s the simple version, because I refuse to let this stay locked in the hedge fund clubhouse. Japan has kept interest rates near zero for decades. For a global investor, that’s an open invitation: borrow money in Japanese yen at basically no cost, then take those borrowed funds and park them somewhere that actually pays — US Treasury bonds, emerging-market shares, property, tech stocks. You keep the gap between what you borrowed (next to nothing) and what you earned (rather more). That gap is called the ‘carry.’ Hence the name.
Sounds like a free lunch, doesn’t it? And you already know how I feel about those. It only works while three things stay put: the yen stays weak, Japanese rates stay low, and the global mood stays calm. Nudge any one of those three, and the whole trade goes into reverse — and it reverses at a speed that takes your breath away.
“A well-telegraphed Bank of Japan normalisation path could allow an orderly unwind. A disorderly one would be felt in markets from New York to Nairobi.”
So let me tell you why 2026 feels different
Japan has changed, and that’s the crux of it. Inflation has run above 2% for more than three years now — the very thing Japan’s policymakers spent thirty years failing to conjure up. The Bank of Japan has already lifted its rate to 0.75%, the highest in three decades. And — this is the part I keep circling back to — it’s hinting there’s more to come. As Japanese bond yields climb and the cost of hedging yen exposure creeps up, the quiet maths that made this trade so irresistible is slowly falling apart.
I’m not the only one watching it with a raised eyebrow. BCA Research has gone as far as calling the yen carry trade ‘a ticking time bomb.’ Analysts at AEI have warned an unwind could land at the worst possible moment — right as US Treasury yields are rising, with the American budget deficit running at something like two trillion dollars a year and a government that really cannot afford its big lenders to start heading for the exit.
Let me paint you the ‘perfect storm’
A full-blown unwind usually needs a few things to go wrong together: the yen strengthening sharply, volatility spiking, and a sudden risk-off mood that spooks leveraged investors into slamming their positions shut all at the same moment. When exactly that happened in August 2024, it triggered a flash crash that rattled markets worldwide in a matter of hours — not weeks, hours. And it wasn’t a one-off. Look back at 2008, 2015, 2020, and you’ll see versions of the same dance.
Now, before you reach for the brandy, a steadier note. The current carry trade is reckoned to be around $261 billion — genuinely large, but nowhere near the multi-trillion figure that sometimes gets thrown about to frighten people. And to its credit, the Bank of Japan has been unusually careful to signal its intentions in advance, which could let the air out gently rather than triggering a stampede for the door. Telegraphed is a world apart from sudden.
How I actually think about all this
Here’s the part that matters for you, and it’s why I bothered explaining any of it: you don’t need to trade a single yen to be affected by this. A sharp unwind would likely mean a stronger yen, weaker global shares (tech especially), falling US Treasury yields, and a jolt of volatility rippling through everything. If your holdings are spread out, you’ll feel a bit of turbulence and move on. If everything you own is piled into the risky end of the market, you may feel considerably more than a bit.
So what do I do with a risk like this? Nothing dramatic, honestly — and that’s the point. I keep things spread across geographies and asset types, I steer well clear of borrowing too much to chase returns, and I try very hard not to mistake today’s calm for a permanent state of affairs. That last one is the discipline, because the calm is seductive. Carry trades never send a warning text before they leave. They just go — and by the time you’ve noticed, the door’s already swinging.
The Jacqueline Brand — knowledge builds confidence, confidence builds wealth. This is editorial commentary for inspiration, not financial or professional advice. Always do your own research. The Collection
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