For the first time in 30 years, U.S.-Japan coordination sent the yen sharply stronger. As short positions betting on a weaker yen swelled to levels seen just before the "yen CARRY trade unwind" in July 2024, concerns are growing that the shock could spread across financial markets. Some, however, said the market impact would be limited even if the yen strengthens again, because the pool of yen CARRY trade funds is smaller than it was then.
According to Bloomberg on the 7th, the dollar-yen rate traded around 158.4 yen in the afternoon. The rate, which had climbed to near 164 yen at the end of July just before the joint intervention by the United States and Japan, fell into the 156-yen range after the intervention, but later rose, retracing about half of its decline.
◇ Yen spikes short term on U.S.-Japan coordination
The yen strengthened sharply after the coordinated intervention by the United States and Japan. The two countries' coordinated currency intervention is the first in 30 years since 1998. The Federal Reserve Bank of New York executed transactions on July 31 on behalf of the U.S. Treasury to sell dollars and buy yen, and the Bank of Japan (BOJ) also bought yen for two straight days. According to Shinhan Investment & Securities, the intervention totaled about 13.7 trillion yen.
The two countries are also considering expanding the cap on the FIMA (Foreign and International Monetary Authorities) repo facility. FIMA allows foreign exchange authorities to raise up to $60 billion (about 9.5 trillion yen) by posting U.S. Government Bonds deposited at the New York Fed as collateral. The market views this size as insufficient to change the dollar-yen trend but likely to ease yen weakness in the short term. In fact, Japan deployed about $70 billion at the end of April and early May to defend the yen.
The unusual U.S. intervention is seen as a step to stabilize the U.S. Government Bonds market. Cha Young-hoo, an analyst at Eugene Investment & Securities, said, "Japan is the largest overseas holder of U.S. Government Bonds, with about $1.14 trillion," and noted, "Because selling U.S. Government Bonds during yen defense would pressure interest rates, they appear to have raised the need to expand the FIMA repo cap to secure dollars without selling U.S. Government Bonds."
◇ Short positions resemble 2024… growing worries over yen CARRY unwind
What the market fears is the unwinding of the "yen CARRY trade." The more yen weakness persists and the lower the exchange-rate volatility, the more attractive the yen CARRY trade becomes, in which investors borrow low-interest yen to invest in overseas risk assets. In early July, when the dollar-yen hovered around 160, Goldman Sachs said "the environment for CARRY trades is the most favorable in over 20 years," naming the yen the most promising funding currency. While the yen's value fell to a 40-year low, U.S. Government Bonds yields stayed near peaks, widening the rate gap between the two countries.
A key concern is that yen short positions have built up to a size similar to when the yen CARRY trade was unwound. Short positions refer to investors betting the yen will fall. If the yen strengthens, investors have more incentive to sell global risk assets to close short positions. In 2024, when the yen CARRY unwound, net short positions flipped from 180,000 contracts in July to net long 20,000 contracts in five weeks, while the Nasdaq index fell 3.43% and the KOSPI sank 8.77%.
According to the U.S. Commodity Futures Trading Commission (CFTC) Commitments of Traders (COT) report, as of the 28th of last month, speculative (non-commercial) net positions in the yen stood at minus 163,400 contracts. Shorts far exceed longs. Given that one currency futures contract is 12.5 million yen, net short positions in the market have already exceeded 2 trillion yen. That is similar to the 2.3 trillion yen net shorts in early July 2024 before the yen CARRY trade was unwound.
◇ Why a yen CARRY unwind is less likely
Still, some said the impact on stocks would be limited, because CARRY trade funds are smaller than they were then. Ha Geon-hyung, an analyst at Shinhan Investment & Securities, said, "The reason the 2024 shock spread not only across Japan's asset market but also more broadly was that mechanical deleveraging, driven by leverage unwinds and a volatility spike, overlapped exchange-rate moves," and projected, "In 2026, leverage in Japan's financial market is minimal, and yen funding has not flowed into overseas risk assets, so selling that starts in Japan will not spill over into other markets."
According to Shinhan Investment & Securities, excluding settlement funds, other investment liabilities peaked in the short term at 61.8 trillion yen in February 2024. By May 2026, the item recorded a net decrease of 1.7 trillion yen, down more than 60 trillion yen from the peak. That means the amount of funds borrowed in yen by foreigners in Japan and invested in overseas assets has shrunk sharply compared with 2024.
It is also uncertain whether the yen itself will return to a strengthening trend. Lee Jin-kyung, an economist at Shinhan Investment & Securities, said, "Past cases show that without backing from structural interest-rate shifts, the effects fade within six months even after large-scale intervention, and the yen moves toward new lows again," and projected, "For a trend reversal, the BOJ needs additional rate hikes and a narrowing of the rate gap as the Federal Reserve eases tightening." In fact, the dollar-yen rate fell through the 3rd after the two countries intervened, but has risen for three straight sessions since the 4th.
Another reason cited for the drop in yen CARRY funds is that funding currencies for CARRY trades have diversified beyond the yen. Daniel Tobin, a strategist at Citigroup, said in a Bloomberg interview, "The situation is different from 2024, when all funds were raised in yen." Goldman Sachs also suggested in a report at the end of July that, given the possibility of yen strength, funding currencies should be diversified into the Swiss franc, euro and Canadian dollar.