Carry Trade Regime
How are BOJ rate normalization and yen appreciation affecting the global carry trade, and at what point does unwinding become self-reinforcing?
The Carry Trade Regime lens tracks the structural dynamics of yen-funded carry trades — the global strategy of borrowing cheaply in JPY and investing in higher-yielding assets worldwide. With BOJ normalization compressing the rate differential that makes carry profitable, and yen appreciation generating mark-to-market losses on foreign holdings, the $20T+ carry trade faces its most significant structural headwind since the BOJ adopted negative rates. This lens maps carry economics, positioning crowdedness, and self-reinforcing unwind dynamics.
Unlike the Monetary Divergence lens, which tracks rate differential transmission across multiple central bank pairs, Carry Trade Regime focuses specifically on JPY-funded carry mechanics: the annualized carry return, CFTC positioning crowdedness, unwind trigger thresholds, and whether the current dynamic is a stable repricing or an approaching cascade. The August 2024 episode — when USD/JPY fell from 162 to 142 in weeks — is the primary evidence base for how quickly self-reinforcing loops can develop.
Signals Produced
Carry Unwind Pressure
CARRY_UNWIND_PRESSURE
FX Regime Shift
FX_REGIME_SHIFT
Analysis Stages
Rate Differential and Carry Economics
What is the US-Japan rate differential, what carry return does it imply, and how far has it compressed from peak?
Yen Positioning and Crowdedness
What does CFTC data show about net JPY short positioning? Is the carry trade crowded or already partially unwound?
Unwind Trigger Assessment
What thresholds would accelerate unwinding? (JPY rate-of-change, BOJ surprise, VIX spike, USD/JPY technical levels)
Self-Reinforcing Loop Detection
Is the current dynamic stable (gradual appreciation priced in) or approaching a cascade (position cuts driving further yen strength)?
Required Sources
Must Have
Level, 3/6/12-month change, rate-of-change acceleration
FRED (DEXJPUS)
Rate, forward guidance, YCC parameters, pace signaling
boj.or.jp
Current level, recent range, BOJ intervention threshold
FRED (IRLTLT01JPM156N) or MOF Japan
Policy rate gap, market rate gap, direction
FRED (DGS2 vs Japan short rate)
Enhances Analysis
Net speculative position, crowdedness vs 5Y range
CFTC.gov Commitments of Traders
Whether BOJ has further hiking room or must pause
FRED (JPNCPIALLMINMEI) or BOJ
Carry unwind triggering broader risk-off
FRED (VIXCLS)
Inflation trajectory, neutral rate assessment, pace signals
boj.or.jp
Dollar funding cost for Japanese banks; stress indicator
Bloomberg / dealer data
When This Lens Applies
Always applicable for BOJ Policy Normalization theme. The carry trade is the primary risk channel unique to this theme.
Heightened Priority Triggers
- USD/JPY falls >5% in a month (yen appreciation accelerating)
- BOJ surprises with faster-than-expected rate hike
- CFTC net JPY short exceeds 80th percentile of 5-year range
- VIX spikes >25 alongside yen strength (carry unwind + risk-off)
- JGB 10Y yield approaches or breaches 1.5%
Technical Details
Related Macro Lenses
Monetary Divergence
How is the policy rate divergence between major central banks reshaping cross-border monetary transmission?
Financial Conditions
Are financial conditions tightening or easing beyond what policy rates suggest?
Global Spillover
How are international dynamics feeding back into US monetary conditions?