After a sharp setback last year, yen carry trades are regaining momentum—driven this time by political instability in Japan. With Prime Minister Ishiba losing his Senate majority, many believe he may be forced to resign, even though he insists he will stay. This instability is reshaping expectations for Japan’s monetary policy, making the yen more attractive as a funding currency for carry trades.
Carry trading involves borrowing in low-interest currencies like the yen and investing in higher-yielding assets elsewhere. This strategy struggled in the past year when Japan’s central bank raised rates unexpectedly, but now, signs of a shift are emerging. Investors anticipate that Ishiba’s government may have to expand fiscal spending to gain support from opposition parties. At the same time, the Bank of Japan is likely to slow down any further interest rate hikes due to political pressure and global uncertainty, making the yen cheaper to borrow.
Some hedge funds are already acting. In recent months, borrowing yen and investing in currencies like the Taiwan dollar, South African rand, or Mexican peso has brought strong returns—around 10–13%—a sharp contrast to the losses seen last year. The recent weakening of the yen against most major currencies further supports the strategy.
The yen’s low interest rate remains a key reason for its popularity in these trades. Despite a few rate hikes since early last year, Japan’s base rate is only 0.5%, far below the US Federal Reserve’s 4.25% to 4.50% target range. And with Japan’s inflation concerns taking a back seat to political uncertainty, the Bank of Japan is unlikely to raise rates aggressively in the near term.
Volatility in the yen has also dropped since the election, making it more attractive for long-term bets. While the carry trade isn’t without risk—especially given the uncertainty around US monetary policy and global market trends—it is once again being viewed as a practical option, especially during quieter summer months.
