By: James Stanley, Sr. Strategist
Currency markets are once again testing the stability of one of global finance’s most persistent funding structures. As of late January 2026, the sharp decline in the U.S. dollar has coincided with renewed stress in USD/JPY, raising questions about whether leveraged positioning is approaching a breaking point. Unlike prior episodes driven by recession fears or growth shocks, the current move reflects strain within long-standing carry trade dynamics. That distinction matters because funding stress has historically spilled beyond foreign exchange into equities and volatility.
James Stanley, Senior Strategist at FOREX.com, has spent years analysing macro-driven FX cycles and their interaction with leveraged positioning. His focus on structural levels, funding costs, and cross-asset linkages gives him a clear vantage point on why the yen carry trade now represents a broader market risk rather than a narrow currency story.
Yen carry trade positioning has grown increasingly fragile after several years of uninterrupted leverage accumulation. Stanley notes that "there is a massive carry trade that is still in this thing", highlighting how borrowing cheaply in Japan and investing in higher-yielding assets became deeply entrenched. As a result, even modest shifts in expectations can trigger outsized moves as positions unwind. This dynamic raises the probability that FX volatility accelerates rather than fades during periods of dollar weakness.
Historical precedent shows that yen carry trade unwinds rarely remain confined to currency markets. Stanley points to past episodes where "that trade could get incredibly one sided", followed by rapid deleveraging once conditions changed. When funding trades reverse, capital is often pulled from equities and other risk assets to reduce leverage. Consequently, renewed stress in USD/JPY increases the risk of broader market volatility rather than acting as an isolated FX adjustment.
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--- Written by Frédéric Guétin, StoneX TV Producer
--- Expert: James Stanley, Senior Strategist, FOREX.com
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