Yen Reverse Carry Trade Fears Return as Traders Warn of 2024-Style Unwind
Concerns are rising again across global macro trading desks that a renewed “yen reverse carry” event could shake markets later this year, with some investors increasingly comparing current conditions to the volatility seen in 2024.
The warning centers around the Japanese yen, the Bank of Japan, and the enormous amount of leverage tied to the global carry trade system.
In private discussions among market participants this week, traders pointed to several developments they believe could create the conditions for another sharp reversal in risk assets.
“Watch out for the Yen reverse carry,” one market participant warned in a text exchange viewed by Rebellion Research.
When asked why, the trader responded bluntly: “Could be similar to 2024.”
The concern stems from the possibility that the Bank of Japan could once again step into currency markets or accelerate monetary tightening as pressure builds on the yen.
The Japanese currency has weakened sharply against the U.S. dollar in recent years. USD/JPY recently approached levels near the highs reached during the extreme volatility of 2024, a period when global markets experienced sudden deleveraging tied to yen-funded positions.
At the same time, Japan’s 10-year government bond yield has climbed to fresh highs, increasing speculation that the Bank of Japan may eventually be forced into additional tightening measures after years of ultra-loose policy.
“USD/JPY near the 2024 highs,” the trader noted. “Japan 10 year yield new high.”
For decades, investors used the yen as a funding currency because Japanese interest rates remained near zero while U.S. and global rates stayed higher. Hedge funds and institutions could borrow cheaply in yen and buy higher-yielding assets elsewhere, including U.S. equities, emerging market debt, commodities, and cryptocurrencies.
That structure became one of the foundational liquidity engines supporting global risk markets.
But when the yen strengthens rapidly or Japanese yields rise unexpectedly, those positions can suddenly become dangerous. Investors are then forced to unwind trades quickly by selling risk assets and buying back yen loans.
This process is known as a reverse carry unwind.
Analysts say the danger lies not only in the currency move itself, but in the sheer size of leveraged positions potentially linked to yen financing worldwide.
The trader also suggested that direct intervention from Japanese authorities remains possible.
“BOJ selling USD to buy Yen,” the trader said, referring to the Bank of Japan and Japanese Ministry of Finance intervention operations used previously to stabilize the currency.
While the timing remains uncertain, some believe the catalyst could arrive if Japanese policymakers finally move toward another rate hike.
“If once they hike, might trigger an unwind,” the trader warned.
Market participants stress that any unwind may still be weeks or months away. However, memories remain fresh from prior episodes where sudden yen appreciation caused sharp volatility spikes across equities, bonds, commodities, and leveraged hedge fund positions globally.
The situation places investors in a difficult position. A weaker yen helps support Japanese exports and corporate earnings, but excessive weakness risks inflation pressures and political backlash inside Japan. Meanwhile, higher Japanese rates threaten one of the most important funding mechanisms underpinning global liquidity.
For now, traders are watching three indicators closely:
USD/JPY approaching prior intervention levels.
Japanese 10-year yields continuing to break higher.
Any signaling from the Bank of Japan regarding rate hikes or currency stabilization efforts.
If all three converge simultaneously, some fear global markets could once again face a rapid and disorderly deleveraging event tied to the unwinding of yen-funded carry trades.
