Yen Carry Trade - Impact for US Stocks

December 1, 2025

Japanese 10yr bond yields reached a new post-COVID high.  See the chart below. Their bond yields have been very low, relative to US treasury yields. JPN's 10yr is 1.87% vs the US 10yr at 4.01%.

I know what you’re thinking.  Who cares about Japanese bond yields?  It matters for an obscure type of market bet called a “carry trade”.  It works like this. A hedge fund will “borrow” in Japan (effectively just shorting Japanese interest rates) and then invest those proceeds in other assets.  

Since the borrow rates in Japan have been very cheap the past five years or so (only 0-2%), it’s a very profitable trade.   But... as the JPN interest rate has risen, the trade has gradually become less profitable. In the last few months, the yield has risen sharply. That has resulted in hedge funds selling whatever they had bought in order to payback their Japan “borrowing”.

The only reason I’m even mention it is because this can cause some market volatility.  If something in the FX or bond market spikes, a whole bunch of hedge funds who are playing this trade might have to all sell their holdings at the same time.  That can cascade into a broader market pullback.  This doesnt look like it’s having much impact today.  But just file it away in case you see a headline mentioning this.

And needless to say, if the JPN yield keeps climbing, that will add to some selling pressure in the US market. As a reminder, the Yen carry trade created significant market disruption (both in Japan and in the US) in August 2024. Interest rate news on both sides caused a sharp reversal in the exchange rate. As such, carry trade bets were unwound dramatically. Japanese stocks fell over 12% in a single day. The US experienced a "flash crash" on August 5th, when stocks fell over 3%. The mechanics of that event were slightly different that what we're discussing here. But regardless, the point here is to keep you informed ... just in case.