Imagine you found a magical bank that lets you borrow money at 0 percent interest. Naturally, you’d take that free money and put it into a high-yield savings account or the stock market to pocket the difference, right?
That, in a nutshell, is the Yen Carry Trade. For over a decade, Japan’s interest rates were stuck near zero – or even negative. Investors, from massive hedge funds to Mrs. Watanabe (the stereotypical Japanese retail trader), borrowed trillions of yen for next to nothing, swapped them for U.S. dollars, and bought higher-yield assets like U.S. Treasuries or even high-flying tech stocks.
It was the ultimate infinite money machine until very recently. Now the glitch has started to fix itself as increased volatility ripples through global markets. The carry trade only works if the yield differential – the gap between Japan’s rates and everyone else’s – stays wide. But in 2026, that is starting to change.
The Bank of Japan (BoJ) finally blinked at inflation in early 2024 and started slowly nudging interest rates up from below 0 percent. Simultaneously, the U.S. Federal Reserve, under intense pressure from President Trump, has been slowly cutting rates. Continue reading
