The 2025 Carry Trade Playbook: Fading the Yen Unwind Risk

The Carry Trade in Context

The yen carry trade — borrowing in low-rate JPY to invest in higher-yielding currencies and assets — has been one of the most profitable strategies of the past decade. With Japanese rates pinned near zero while the Fed hiked to 5.5%, the structural incentive to be short yen was overwhelming.

The Bank of Japan's rate hike cycle, now at 0.5%, has rattled this trade but not unwound it entirely.

"The carry trade is like picking up nickels in front of a steamroller. The nickels are real, but you need to know where the steamroller is." — Legendary FX trader commentary

Why the "Unwind" Was Overstated

The August 2024 yen volatility spike (USD/JPY fell from 161 to 141 in three weeks) was dramatic but ultimately an overcorrection. By year-end, the pair had recovered to 157. Why?

Rate differential remains wide: With Japan at 0.5% and the US at 5.25–5.50%, there's still a 475bps interest rate advantage to being short yen
Positioning was cleaned out: The CFTC data shows speculative short JPY positioning dropped 70% during the spike — most of the unwind happened fast
BoJ communication remained cautious: Despite hiking, Governor Ueda has been at pains to signal gradual, data-dependent tightening

The Current Setup

With USD/JPY in the 150–157 range and positioning cleaner, the reward/risk of carry is more attractive than it was at 161. The key risks:

BoJ acceleration: A surprise 50bps hike would be a carry unwind catalyst
US recession: Risk-off typically strengthens the yen as carry is unwound
BoJ intervention: Above 160, the Ministry of Finance has shown willingness to intervene

Trade Ideas

Long AUD/JPY on dips to 96: Australian rate differentials and commodity tailwinds support this pair
Long USD/JPY rallies above 155 with stops at 151: Trend trade with defined risk
Options: Buy USD/JPY upside calls for limited risk expressions

This article reflects the author's personal trading view and does not constitute financial advice.