The Unwinding Yen Carry Trade and Its Impact on Asian Equities

The yen carry trade, a cornerstone of global financial markets for decades, is now in full retreat. As the Bank of Japan (BOJ) exits its ultra-loose monetary policy era, rising yen volatility and a risk-off pivot in global markets are destabilizing leveraged positions, forcing investors to reassess exposures to Asian tech/AI stocks and Japanese equities. The writing is on the wall: portfolios must pivot to defend against this structural shift. Here’s how to position for a carry trade correction.

The End of the Carry Trade Era

The yen carry trade—borrowing low-yielding yen to invest in higher-yielding assets—thrived under the BOJ’s Yield Curve Control (YCC) policy, which suppressed Japanese bond yields. But with YCC’s demise in 2024 and the BOJ’s gradual rate hikes (to 0.5% in May .2025, with 1.0% projected by 2026), the yen’s appreciation is now a self-fulfilling prophecy.
The yen’s ascent—from 151.50 to 135.20 since mid-2024—has already triggered profit-taking in leveraged positions. For every 1% yen appreciation, investors in yen-funded carry trades lose ~2-3% in unhedged terms. This dynamic is now spilling into Asian equities.

Asian Tech/AI Stocks Under Pressure

Asian tech and AI stocks, fueled by cheap yen financing, are among the first casualties.
- Profit Taking in Leveraged Positions: As carry trades unwind, investors are exiting high-beta tech/AI names. For instance, Korean semiconductor firms and Chinese AI startups, which relied on yen-denominated debt, face margin calls or liquidity squeezes.
- Valuation Risks: The BOJ’s downward GDP revision (0.5% for FY2025) and global recession fears are compressing Asian tech multiples. Even stalwarts like Taiwan’s semiconductor giants are underperforming as capital flows pivot defensive.

Japanese Equities: A Mixed Picture

Japan’s equity market is experiencing a bifurcation:
- Banks and Financials: Benefiting from higher rates (net interest margins expanded 15-20% in 2024).
- Export-Heavy Sectors: Auto and machinery stocks (e.g., Toyota, Sony) face headwinds as a stronger yen reduces profit margins on dollar-denominated sales.

The Investment Imperative: Position for a Carry Trade Correction

Investors must act decisively to mitigate risks and capitalize on opportunities in this new environment:

1. Reduce Exposure to Yen-Sensitive Assets

• Sell High-Beta Carry Plays: Exit leveraged positions in Asian tech/AI stocks and Japanese exporters.
• Hedge USD/JPY Downside: Use options or forwards to protect against further yen appreciation (projected 10-15% by end-2025).

2. Shift to Defensive Sectors

• Utilities and Staples: Japanese firms like Tokyo Electric Power and Seven & I Holdings offer stable cash flows.
• Healthcare: Global demand for biotech and medical devices (e.g., Fujifilm’s healthcare division) is recession-resistant.

3. Favor Safe-Haven Currencies and Gold

• Swiss Franc (CHF): The SNB’s dovish stance and CHF’s safe-haven appeal make it a better funding currency than the yen.
• Gold: A stronger yen and risk-off sentiment are bullish for gold, which acts as a hedge against yen volatility and inflation uncertainty.

4. Monitor Geopolitical Risks

The U.S.-Japan trade negotiations and China’s tech policies add layers of uncertainty. A “risk-off” spiral could accelerate yen gains and equity declines.

Final Call to Action

The yen carry trade’s unwind is not a temporary blip—it’s a structural shift. Portfolios must adapt now:
- Cut exposure to yen-sensitive equities.
- Hedge USD/JPY downside with options.
- Reallocate to defensive sectors and safe havens.

In a world of narrowing yield differentials and rising macro risks, prudence trumps aggression. The time to act is now—before the correction accelerates.