(Feb 11): The carry trade in the yen is “a ticking time bomb,” with the popular hedge-fund strategy vulnerable to a massive unwind, according to BCA Research analysts.
The trade — broadly defined as borrowing in the low-yielding Japanese currency to fund purchases of higher-yielding assets — benefits from the greater “carry” on these foreign investments. But the trade unravels if the riskier assets tumble or the yen rallies.
The BCA team led by Arthur Budaghyan sees the risk of a similar collapse in the trade to those seen in 2008, 2015 and 2020. On those occasions, a downturn in global risk sentiment sparked a sudden de-leveraging, with investors rushing to buy yen.
“Our hunch is that the next unwinding case will also be triggered by a combination of a drop in ‘carry assets’ and/or a rebound in the yen,” the team wrote in a note dated Feb 10. “It is impossible to know which will occur first. But they will reinforce each other, resulting in a major reversal of the yen carry trade.”
BCA analysts recommend medium- and long-term investors go long the yen versus the US dollar.
It’s the latest warning regarding the strategy as the yen rebounds from historically weak levels, with traders eyeing potential Bank of Japan (BOJ) rate hikes later this year. The Japanese currency is up over 1% against the greenback so far in 2026, moving it away from a zone seen triggering intervention from the BOJ. It currently trades around 154.4 per dollar, down from close to the 160 level last month.
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The BCA researchers said it was hard to put a precise estimate on the size of the yen carry trade. However, they said various metrics suggest it has “proliferated over recent years” and that the amounts involved are “substantial.”
“When the yen begins appreciating, the move will be sizeable because of the proliferation” of yen carry trades, they wrote.
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