The U.S.–Japan Carry Trade
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Through this study, I examine how we can investigate the structural mechanics and systemic vulnerabilities of the U.S.–Japan foreign exchange (FX) carry trade, focusing on the systemic market disruptions triggered between mid-2024 and 2026. The U.S.–Japan carry trade—characterized by borrowing low-yielding Japanese yen (JPY) to finance investments in higher-yielding U.S. dollar (USD) denominated assets—served as a primary driver of global capital flows under divergent monetary policy regimes. Utilizing daily asset pricing, yield spreads, and foreign exchange intervention data from the Japanese Ministry of Finance (MoF) and the Bank of Japan (BoJ), this paper examines the transmission mechanisms linking monetary policy shifts, official JPY-buying interventions, and market liquidity squeezes. The empirical findings indicate that direct FX market interventions exceeding ¥9.8 trillion in mid-2024, coupled with unexpected BoJ policy rate adjustments (lifting benchmark rates from negative territory to 0.25% in July 2024 and subsequently higher into 2026), compressed the policy rate differential and induced a sharp unwinding of leveraged positions. This unwinding precipitated historical intraday equity market declines—most notably the 12.4% single-day contraction of the Nikkei 225 on August 5, 2024—and widespread liquidity shocks across international equity, fixed-income, and digital asset markets. The study highlights the heightened sensitivity of international financial stability to rapid shifts in global debt-funded funding currencies.
Keywords
Bank Of Japan, Foreign Exchange Intervention, Monetary Transmission, Systemic Risk, U.s.–japan Carry Trade, Unwinding Squeeze