The global impact of Japan’s rate shift.

By the OFX team | 10 June 2026 | 6 minute read

Known for decades as the “carry trade”, it’s effectively interest rate arbitrage, exploiting the interest rate gap between two different economies to generate a profit.

But there are signs that the carry trade could be reversing, raising concerns of a growing risk for global markets.

How the carry trade works in practice.

By far the most common carry trade has been to borrow cheaply in Japan, tapping into historically low interest rates and using the yen as a funding currency; convert that yen amount to US dollars; and buy higher-yielding US Treasuries or other US dollar-denominated assets, such as tech stocks or more recently, cryptocurrency. The investor benefits from this arrangement by earning the higher interest rate offered in the US, or returns from the USD-denominated assets, while paying the lower interest rate in Japan.

The return is the “carry” – the net difference between the interest earned on the investment and the interest paid on the loan; investors often magnify this return with leverage.

In theory, the carry trade works anywhere there is an interest rate differential, and the Swiss franc has also occasionally been used as the borrowing currency; but it has been most closely associated with Japan, which has provided an extreme scenario¹.

In the wake of Japan’s economic crash in the 1990s, the Bank of Japan (BoJ) maintained extremely low interest rates to combat deflation. In 2016, the central bank took its benchmark rate negative, where it stayed for nearly a decade. At the same time, western nations like the US kept rates much higher, entrenching the carry trade as an easy, lucrative strategy. The trade has built up trillions of dollars in positions across global markets, including equities, bonds, and crypto. Estimates of the size of carry trade ranges from US$1 trillion to US$20 trillion (the real size is considered more likely to be toward the lower end of that range), acting as a massive source of liquidity for global markets².

The carry trade has been a significant source of support for the USD. The US dollar is generally backed by structurally higher interest rates and yields set by the Federal Reserve; the continuous, high-volume demand to buy US dollars to invest in Treasuries and other US assets helps to put upward structural pressure on the currency’s exchange rate. The trade performs well under conditions of low forex market volatility, a gradually weakening yen relative to USD, and negative interest rates in Japan paired with higher rates in the US, creating a wide interest rate spread³.

Like the carry trade, low Japanese yields – often close to zero – also forced institutional Japanese investors such as pension funds and insurance companies to buy US government bonds, which were far more attractive in comparison to Japanese government bonds (JGBs). Japan has become one of the largest foreign holders of US Treasuries.

The carry trade is not set in stone: there have been periods, notably in January–September 2016 and October 2022–January 2023, when changing interest rate differentials led to sudden short-term yen appreciation. In both instances, the trade stabilised and returned to profitability⁴. But the long years of yen carry trade complacency may be numbered, and the reverse of the trade – a multitrillion-dollar unwind – could be starting to move through global markets.

The first meaningful sign came in March 2024, when the BoJ ended its negative interest rate policy – a policy that had been in place since 2016. The BoJ raised the interest rate from –0.1% to a range of 0%–0.1%, and officially abolished the controversial yield curve control (YCC) policy, which had been capping long-term interest rates near zero since 2016.
At the same time as this abrupt change to Japan’s long-running ultra-loose monetary strategy, markets adjustedt to incorporate expectations of a lower federal funds rate in the US, reducing the expectation of the interest rate gap between the yen and the USD and eroding the profit potential of carry trades.
This combination sent the JPY surging against the US dollar, prompting many carry trade positions to be liquidated quickly – putting pressure on “big tech” stocks that had benefited from these trades⁵.

In July 2024, the BoJ implemented a more aggressive hike, raising the short-term policy rate to approximately 0.25%, as sustained wage growth and persistent inflation enabled the bank to ‘normalise’ its monetary policy. At the time, JP Morgan pointed to an 11% rally in the yen that pushed once-profitable carry trades into the red⁶. Then, in December 2025, Japan’s central bank lifted interest rates to a 30-year high, a shift that flagged a strengthening the yen and further unsettled global markets⁷.

This nervousness is coalescing around the JGB market, which is rapidly becoming a critical focal point for global investors – and a key indicator of a reversing carry trade.

The main reason for this is that Japan is one of the largest foreign holders of US Treasuries. For many years, Japanese investors such as pension funds and insurance companies have dealt with low domestic bond yields by buying higher-yielding US bonds. In doing that, they have been happy to take currency risk and hedging costs. This has been a long-standing strategy, but the question that worries markets is, when might domestic bonds become attractive enough again for the Japanese institutional investors?

Signs the carry trade is unwinding.

The 10-year JGB yield began 2024 at 0.7%; it began 2025 at just under 1%; it began 2026 just under 2.1%. On May 19, it pushed through 2.8%, its highest since 1996, and at time of writing had retreated to 2.7%. In the Takaichi era, which began in October 2025 – since when Prime Minister Sanae Takaichi’s administration, including finance minister Satsuki Katayama, has held the policy reins – the 10-year yield has surged by one percentage point, to 2.7%.

The point at which rising JGB yields made domestic bonds start looking attractive again for major Japanese institutions – and give them an incentive to repatriate capital from US assets – was widely considered the 1.75%–1.77% range. We are well past that point: the 2026 trajectory of JGB yields could well be a genuine inflection point, where Japanese investors have real return alternatives to foreign bond holdings, particularly US Treasuries. As this calculation changes, we could be seeing the ripple effects start to flow into global asset prices. For example, as Japanese investors sell US Treasuries and bring their money back home – joining the Chinese in doing so – that is putting upward pressure on US yields. In May, the US 10-year yield pushed past 4.67% — the highest in more than a year.

As broker Swissquote puts it, sustained repatriation of Japanese capital homeward would mean structurally less liquidity for global markets, because Japan is one of the world’s largest pools of savings. “A sustained repatriation flow could reduce demand for US Treasuries and global risk assets, put upward pressure on global borrowing costs, strengthen the yen structurally, and tighten global liquidity conditions after years of abundant Japanese-funded capital supporting everything from US tech stocks to emerging markets,” says the broker.

As such, any further indications that the carry trade reversal could be strengthening could add to pressure on global markets; if it demonstrably became stronger, such a shift has the potential to snowball into a risk-off event, crossing correlations as exposed traders face pressure to de-leverage and sell assets to raise liquidity.

In the short term, traders are warily eyeing the possibility of another BoJ rate hike. The central bank will meet on June 16–17 and markets are increasingly expecting the BoJ to raise rates from 0.75% to 1% at that meeting, further crimping the cheap yen funding that has underpinned the carry trade for so long.

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