Yen Carry Trade Faces Pressure as BOJ Hints at Faster Rate Hikes

The yen carry trade, long a staple of global finance, is being tested by expectations that the Bank of Japan will accelerate rate hikes, possibly at its meeting next week. A recent rise in the yen to a seven-month peak has led investors to move away from yen funding toward the Swiss franc. The trade, which involves borrowing yen to purchase higher-yielding assets like the U.S. dollar or emerging-market currencies, once generated 5-6% returns but now offers around 2.5-3.5%.

Data from the Bank for International Settlements show cross-border yen borrowing reached a record 360 trillion yen in March, while the CFTC reported a decline in net short yen contracts since July. Analysts note that, unlike the abrupt unwind in July 2024, current market moves appear orderly, reflecting a shift in investor sentiment ahead of the BOJ decision.