The Yen Carry Trade Unwind: How Rising JGB Yields Threaten Global Markets

The Japanese 10-year government bond yield (JGB) has surged to 1.47%, its highest level since early 2015, marking a dramatic shift from years of ultra-low rates. This rise, fueled by the Bank of Japan's (BOJ) gradual exit from unconventional policies and mixed economic signals, threatens to unravel one of the longest-running carry trades in financial history. For global markets, this could mean reduced liquidity in U.S. equities, a stronger yen, and heightened volatility.

The Carry Trade Mechanism and Its Fragility

The yen carry trade—borrowing cheap yen to invest in higher-yielding assets—is a cornerstone of global liquidity. When JGB yields are near zero, investors can borrow yen at negligible cost and deploy capital into riskier assets like U.S. tech stocks or emerging markets. But as JGB yields rise, the cost of this funding increases, eroding the trade's profitability.

The BOJ's policy pivot since 2024 has accelerated this shift. After ending its negative rate policy and Yield Curve Control (YCC) program in September .2024, the central bank signaled a move toward normalization. While it has paused further hikes amid economic uncertainty, the mere expectation of higher JGB yields has already begun to reverse carry trades.

Why This Matters for U.S. Equities

U.S. tech stocks, particularly those with high valuations and reliance on cheap capital, are among the most vulnerable. Carry trade flows have been a significant source of foreign buying in U.S. markets, especially in sectors like semiconductors and cloud computing. A reversal would drain liquidity, potentially triggering a rerating of growth stocks.

Consider NVIDIA (NVDA) and Microsoft (MSFT): Both have thrived in an environment where global investors could borrow yen at 0.1% to chase their double-digit revenue growth. If yen funding costs rise to 1–2%, the calculus shifts. Investors may instead repatriate capital to Japan to capitalize on rising yields or hedge against a stronger yen.

The Yen's Role in Global Liquidity

A stronger yen, driven by capital repatriation, could amplify the unwind. The yen has already appreciated nearly 3% against the dollar year-to-date, and further gains could accelerate outflows. A weaker dollar, meanwhile, might pressure dollar-denominated assets, including U.S. Treasuries and corporate bonds.

Risks and Investment Implications

1. Tech Sector Vulnerability: U.S. tech stocks could face downward pressure as carry trade capital retreats. Investors should consider scaling back exposure or using put options to hedge.
2. Yen Exposure: Positions in Japanese equities or yen-denominated bonds (e.g., JGBs) may benefit from the repatriation flow, though volatility remains high.
3. Diversification: Investors reliant on global equities should rebalance toward regions less dependent on carry trade liquidity, such as Europe or commodities.
4. Hedging Tools: Currency forwards or ETFs like FXY (short yen) could mitigate yen-related risks.

Conclusion: Navigating the Unwind

The BOJ's policy normalization and rising JGB yields are testing the limits of a decades-old market structure. While forecasts suggest yields may ease slightly to 1.44% by year-end, the structural shift is irreversible. Investors must prepare for reduced liquidity in growth-oriented assets and a yen that could increasingly act as a safe-haven magnet.

For now, the playbook is clear: reduce exposure to yen-sensitive tech stocks, monitor yen movements, and hedge currency risk. The unwind may be gradual, but its consequences for global markets are anything but.