Is the Yen quietly reclaiming its role in carry trades?

Once considered a relic of pre-2008 trading, the yen carry trade is beginning to stir once more - like a familiar ghost returning to old haunts. With traders eyeing up Japan’s ultra-low rates and a Fed still wary of inflation, some are quietly positioning for a return to a strategy that once defined global capital flows.

Sure, headlines have been dominated by former President Trump’s self-declared “historic” trade pact with Japan - replete with claims of a $550 billion investment and a 15% reciprocal tariff shockwave. But the FX market? It’s barely flinched. USDJPY recently slipped below 147, and the dollar index has lost some of its shine.

Behind the scenes, a more subtle narrative is taking shape - one that hinges on interest rate differentials, market fatigue, and a Japan that’s sticking stubbornly to its low-rate script.

The trade deal that was supposed to move markets

President Trump hailed the agreement as a game-changer - the “biggest deal ever” between the U.S. and Japan. On paper, it includes hundreds of billions in Japanese investment and market access for American autos, agricultural goods, and more. Japan’s top negotiator even signed off with a victorious “Mission Complete” on X.

Source: Trading View

But the markets barely blinked. Instead of pushing USDJPY higher, the pair dropped, suggesting traders weren’t buying the hype. Sentiment seemed more anchored to the Fed’s cautious stance and global risk dynamics than to any geopolitical fanfare.

The carry trade: Back from the shadows?

At its heart, the carry trade is straightforward: borrow low-yielding currencies (like the yen), and invest in higher-returning assets. For decades, Japan’s rock-bottom interest rates made it the ideal funding base.

But the glory days faded after 2008. A global pivot to ultra-low rates, increased volatility, and tighter monetary convergence dulled the spotlight. 

Carry Trade Cumulative Returns before the Financial Crisis

Source: AtlasFX, Verdad

Carry Trade Cumulative Returns after Financial Crisis

Source: AtlasFX, Verdad

Yet in today’s environment, with Japan stuck in low gear and the Fed reluctant to cut aggressively, the carry trade case is regaining some traction.

Inflation remains sticky in the U.S., trade-driven price distortions are back in focus, and Japan’s economy is limping along with weak wage growth and muted domestic demand. This divergence - one central bank wary of cuts, the other glued to zero - is fertile ground for the quiet return of the carry trade.

USDJPY: Losing steam or gearing up?

Despite the setup, USDJPY hasn’t exactly broken out. In fact, it’s retreated beneath 147. The earlier surge - driven by yield gaps and risk-on sentiment - has cooled, and traders seem content to wait.

The Bank of Japan’s hands-off approach, coupled with lukewarm inflation and shaky political undercurrents, is keeping policy static. At the same time, questions linger around whether Japan’s massive U.S. investment pledge is more sizzle than substance.

Tokyo’s political tangle

Meanwhile, Japan’s domestic politics aren’t doing the yen any favours. Prime Minister Shigeru Ishiba just lost his upper house majority, relying now on smaller coalition allies to govern. It’s not a crisis, but it’s not a strong mandate either.

A thinner majority means limited scope for economic reform - particularly as U.S. demands around trade deepen. While markets prefer Ishiba’s status quo to an opposition surge, the result leaves the BoJ with even fewer reasons to adjust course.

A quiet shift, not a stampede

So, is the yen carry trade officially back? Not quite. But the groundwork is being laid. A mix of low volatility, diverging central bank policies, and risk repricing could easily revive it.

The trade agreement may have soothed near-term tensions, especially around tariffs. But the bigger story lies in the structure of global capital: if traders once again view the yen as a stable, cheap funding currency - rather than a haven - the implications for USDJPY could be profound.

Carry trades don’t explode back onto the scene. They creep in, quietly and methodically. And while Trump’s tariff theatrics steal the spotlight, it’s the slow re-emergence of this once-powerful strategy that could end up driving the next big move in USDJPY.

USDJPY technical outlook

At the time of writing, the pair has recovered some ground from earlier drawdowns, hovering around a support level, hinting at a potential move up.

However, the volume bars show strong sell pressure over the past two days with little pushback from buyers, hinting at a potential further drawdown if buyers don’t push with conviction. A move down could find support at the $146.74 and $142.67 support levels. Conversely, a move up could find resistance at the $149.19 and $151.16 price levels.

Source: Deriv X

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The information contained within this article is for educational purposes only and is not intended as financial or investment advice. We recommend you do your own research before making any trading decisions.

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