Yen Carry Trade Strains Expose the Cheap Funding Behind the AI Rally

Borrowing costs in Japan at or near 0% have funded leveraged positions across global markets for years, and AI stocks are among the assets built on that cheap money. The yen carry trade affects tech stocks because capital borrowed in yen and hedged through the currency market flows into risk assets, so any strain on that funding can pull leverage back out. That strain is now showing up as the Nasdaq 100 slides, U.S. Treasuries rally and Japan's Nikkei 225 sits at a critical juncture. The setup recalls July 2024, when a carry trade unwind sent tremors through equity markets worldwide.

James Stanley, StoneX Media Senior Market Analyst, brings more than two decades of market experience spanning equities, options, fixed income and foreign exchange. He analyzes price action and macroeconomic drivers on medium-term time frames of two days to two weeks, tracking how currency funding, bond yields and equity indices move together.

Key Themes

• Near-zero Japanese borrowing costs fund leveraged positions across global risk assets, AI stocks included.
• Carry traders sell the yen to hedge currency risk, tying their positions to Dollar Yen.
• The July 2024 carry trade unwind coincided with a sharp Nasdaq selloff and a major VIX spike.

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Yen Carry Trade Turns Near-Zero Japanese Rates Into Global Leverage

The yen carry trade works by borrowing in Japan, where rates have sat at or near 0% and at times below zero, and putting that capital to work in higher-yielding markets. According to Stanley, "if you could get a loan from a Japanese bank at near 0% and then you could invest that capital elsewhere, could basically try to pocket the spread". The first stop is often U.S. Treasuries, a low-risk way to capture the rate gap between Japan and the U.S. Over the past five years, that cheap funding has reached well beyond bonds and helped build leverage across risk assets, including the AI trade. As a result, the yen carry trade sits beneath far more of the market than a simple bond spread suggests.

Yen Carry Traders Sell the Yen to Neutralize Currency Risk

Currency risk is the weak point of the yen carry trade, because a loan taken in yen leaves the borrower exposed to swings in the Japanese currency. A spread of 2% to 3% over U.S. Treasuries, or 4% to 5% in other markets, offers thin protection against a large move in the yen. To manage that exposure, carry traders sell the yen in the market, offsetting the yen leg and taking on U.S. dollar, euro or British pound risk instead. Specifically, that hedge ties the health of carry positions directly to Dollar Yen. Without it, Stanley explains, the trade is "not that enticing, not all that exciting, and it's going to get blown up just from currency risk".

Yen Carry Trade Unwind Echoes the July 2024 Nasdaq Selloff

"This is a global deleveraging event. This is capital being pushed from cheap Japanese rates that help to build bubbles in all segments of the market, AI included", Stanley says of the slide in tech stocks. The Nasdaq 100 and Japan's Nikkei 225 are moving in similar fashion, and Dollar Yen is weakening without the threat of Bank of Japan intervention that drove earlier yen strength. In July 2024, a comparable unwind followed a U.S. CPI print and Bank of Japan intervention in Dollar Yen, and within weeks tech stocks were hit hard as the VIX index posted one of its largest spikes on record. The current unwind remains at an early stage, yet the July 2024 episode shows how quickly carry trade leverage can leave risk assets once it starts.

--- Written by Frédéric Guétin, StoneX Media Producer

--- Expert: James Stanley, StoneX Media Senior Market Analyst