Strong Dollar: Will the Yen Carry Trade Nightmare of 2024 Return?

▲ Japanese Yen (JPY), US Dollar (USD)/AI generated image

The strong dollar is fueling the yen carry trade once again. A warning has been issued that if the Japanese authorities' intervention to defend the yen materializes, a sharp liquidation of positions that could shake even the US stock market could recur.

According to MarketWatch on July 2 (local time), with the strong US dollar pushing the Japanese yen to a 40-year low against the dollar, the risk of a yen carry trade is increasing again. The yen carry trade is a strategy of borrowing funds in low-interest yen and investing them in high-yield dollar assets such as US tech stocks or Treasury bonds. The dollar-yen exchange rate recorded 162.38 yen on Wednesday afternoon.

The core of market instability is that the weaker the yen becomes, the greater the likelihood of intervention by Japanese authorities in the foreign exchange market. If the yen suddenly strengthens, investors will have to buy yen back to repay the borrowed yen. At the same time, they will have no choice but to sell risky assets such as US stocks and bonds, which could increase stock market volatility.

MarketWatch reported that the market is watching the possibility of Japanese authorities using the US Independence Day holiday period to defend the yen. During periods of thin liquidity due to US market closures, the impact of intervention can spread more widely. Fawad Razaqzada, a Forex global macro market analyst, said, "With much weaker US employment figures, Japanese authorities have a greater reason to sell more of their dollar holdings to lower the dollar-yen exchange rate."

The yen carry trade appears stable in periods of low volatility, but its structure leads to rapidly increasing losses if intervention or a narrowing of interest rate differentials occurs. Stephen Innes, Managing Partner at SPI Asset Management, pointed out, "The yen is a powerful but risky funding currency that shows low volatility until, at some point, it doesn't." He added, "The key is not to act as if there will be no intervention."

However, some analyses suggest that the possibility of a shock similar to 2024 recurring is low. Chris Getter, Portfolio Manager at Simplify Asset Management, believes that investors are not as complacent as they were in 2024, and yen carry trade positions are lighter than they were then. The Bank of Japan is also evaluated to have changed its communication approach with the market by intervening more frequently in the foreign exchange market this year.

The strong dollar is also a variable. The ICE U.S. Dollar Index (DXY) has shown an upward trend since May and has risen 2.5% since the beginning of 2026. MarketWatch reported that inflation pressures from the US-Iran conflict and hawkish remarks from Federal Reserve Chairman Kevin Warsh supported the dollar. Naomi Fink, Chief Global Strategist and Chief Economist at Amova Asset Management, said, "There might not be an immediate catalyst to end the carry trade, but tail risks are thick, and the possibility of a regime shift is higher than usual."

[Article Summary]

-The yen has fallen to a 40-year low against the dollar, renewing the risk of yen carry trade liquidation.

-The dollar-yen exchange rate recorded 162.38 yen on Wednesday afternoon, and the possibility of intervention by Japanese authorities has emerged as a market variable.

-MarketWatch reported that while a 2024-style shock is unlikely to be repeated, the risk of rapid position liquidation due to narrowing interest rate differentials and policy intervention remains high.

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