The USD/JPY exchange rate rose from 105 before the pandemic to 160 in 2024, filling every café in Shibuya, Tokyo with foreigners.
But those good times seem to be quietly shifting.

One reason is that a massive trade that has lasted nearly a decade is beginning to unwind:
The yen carry trade is starting to unwind.

What is the yen carry trade? Simply put:

1. The Bank of Japan implemented Yield Curve Control (YCC), aggressively buying Japanese government bonds to suppress interest rates;

2. Japanese insurers, pension funds, and corporations took advantage of cheap yen to invest in U.S. stocks and bonds overseas.
   With high U.S. interest rates and low Japanese rates, capital flowed out en masse, and the yen kept depreciating;

3. Meanwhile, U.S. stocks had a decade-long bull run, and with the weakening yen, returns converted back to yen were significantly amplified.

But now, YCC is starting to loosen, and the Federal Reserve is about to enter a rate-cutting cycle—
the interest rate gap that made this trade profitable is slowly disappearing… (to be continued)

The USD/JPY exchange rate rose from 105 before the pandemic to 160 in 2024, filling every café in Shibuya, Tokyo with foreigners.
But those good times seem to be quietly shifting.

One reason is that a massive trade that has lasted nearly a decade is beginning to unwind:
The yen carry trade is starting to unwind.

What is the yen carry trade? Simply put:

1. The Bank of Japan implemented Yield Curve Control (YCC), aggressively buying Japanese government bonds to suppress interest rates;

2. Japanese insurers, pension funds, and corporations took advantage of cheap yen to invest in U.S. stocks and bonds overseas.
   With high U.S. interest rates and low Japanese rates, capital flowed out en masse, and the yen kept depreciating;

3. Meanwhile, U.S. stocks had a decade-long bull run, and with the weakening yen, returns converted back to yen were significantly amplified.

But now, YCC is starting to loosen, and the Federal Reserve is about to enter a rate-cutting cycle—
the interest rate gap that made this trade profitable is slowly disappearing… (to be continued)