Definition
Yen Carry Trade Unwind
A yen carry trade unwind is the rapid reversal of positions funded by cheap Japanese yen borrowing, which can spark global selloffs as investors buy back yen and dump risk assets.
For years the Bank of Japan kept rates near zero, making the yen the world's favourite funding currency. Traders borrowed yen to buy higher-yielding global assets, from US tech stocks to emerging-market bonds.
When the BoJ hints at tightening or the yen suddenly strengthens, these trades reverse fast: investors sell risk assets to repay yen loans, spiking volatility worldwide. The August 2024 episode showed how a yen unwind can drag down equities globally, including spillover pressure on Indian markets and the rupee.
Related terms
- Carry TradeA carry trade borrows in a low-yielding currency and invests in a higher-yielding one, profiting from the interest rate differential as long as the exchange rate stays stable.
- Safe-Haven CurrencyA safe-haven currency tends to hold or gain value during global stress as investors seek security, the classic examples being the US dollar, Swiss franc and Japanese yen.
- Risk-On / Risk-OffRisk-on and risk-off describe market regimes: in risk-on, investors buy equities and emerging assets, while in risk-off they flee to safe havens like bonds, gold and the dollar.
- Bank of Japan (BoJ)The Bank of Japan is Japan's central bank, long known for ultra-loose policy including near-zero rates and yield curve control to fight decades of deflation.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.