Strong Dollar, Will It Bring Back the Yen Carry Trade Nightmare of 2024?

▲ Yen (JPY), Dollar (USD)/AI-generated image

The strong dollar is once again fueling the yen carry trade. A warning has been issued that if the Japanese authorities' intervention to defend the yen materializes, a sudden liquidation of positions that could shake even the US stock market might recur.

According to MarketWatch on July 2 (local time), with the strong US dollar, the Japanese yen has fallen to a 40-year low against the dollar, increasing the risk of the yen carry trade. The yen carry trade is a strategy where funds are borrowed in low-interest yen and invested in high-yield dollar assets such as US tech stocks or government bonds. The dollar-yen exchange rate recorded 162.38 yen on Wednesday afternoon.

The core of market instability is that the weaker the yen becomes, the greater the likelihood of intervention by Japanese authorities in the foreign exchange market. If the yen suddenly strengthens, investors will have to buy yen back to repay the borrowed yen. At the same time, they will have no choice but to sell risky assets such as US stocks and bonds, which could increase stock market volatility.

MarketWatch reported that the market is watching the possibility of Japanese authorities intervening to defend the yen during the US Independence Day holiday period. Intervention shocks can spread more widely when liquidity is thin due to US market closures. Fawad Razaqzada, a global macro market analyst at Forex, said, "With US employment figures coming in much weaker, Japanese authorities have a greater reason to sell more of their dollar holdings to lower the dollar-yen exchange rate."

The yen carry trade appears stable in periods of low volatility, but its structure leads to rapid increases in losses if intervention or a narrowing of interest rate differentials occurs. Stephen Innes, Managing Partner at SPI Asset Management, pointed out, "The yen is a powerful but risky funding currency that shows low volatility until it suddenly doesn't." He added, "The key is not to act as if there will be no intervention."

However, some analyses suggest that a shock similar to 2024 is unlikely to be repeated. Chris Getter, Portfolio Manager at Simplify Asset Management, believes that investors are not as complacent as in 2024, and yen carry trade positions are lighter than they were then. The Bank of Japan is also assessed to have changed its communication approach with the market by intervening more frequently in the foreign exchange market this year.

The strong dollar is also a variable. The ICE U.S. Dollar Index (DXY) has been on an upward trend since May and has risen 2.5% since 2026. MarketWatch reported that inflation pressures from the US-Iran conflict and hawkish remarks by Federal Reserve Governor Kevin Warsh supported the dollar. Naomi Fink, Chief Global Strategist and Chief Economist at Amova Asset Management, said, "There may not be a catalyst to end the carry trade immediately, but tail risks are thick, and the potential for a regime shift is higher than usual."

[Article Summary]

-The yen has fallen to a 40-year low against the dollar, increasing the risk of yen carry trade liquidation.

-The dollar-yen exchange rate recorded 162.38 yen on Wednesday afternoon, and the possibility of intervention by Japanese authorities has emerged as a market variable.

-MarketWatch reported that while a 2024-style shock is unlikely to be repeated, the risk of rapid position liquidation due to narrowing interest rate differentials and policy intervention remains high.

*Disclaimer: This article is for investment reference only, and we are not responsible for investment losses based on it. The content should be interpreted for informational purposes only.*