The Yen is Moving Again

How Japan’s Currency Could Disrupt Global Markets

By: Sophia Paul

30 September, 2026

Why Has the Yen Been So Weak?

For over 30 years, Japan has maintained extremely low interest rates, reaching a policy rate of -0.10% in 2016. In more recent years, rates have gradually climbed, remaining below 1.00% until June 2026. In September, Japan raised its policy rate to 1.25%, its highest level in more than 30 years.

Those low rates helped fuel the yen carry trade, in which investors borrow yen and use the proceeds to purchase higher-yielding assets in other currencies. The strategy can create additional selling pressure on the yen as investors exchange yen for foreign currencies. Another factor influencing the yen is trade. Japan’s largest import category is oil and mineral fuels, which are global commodities largely priced in U.S. dollars. Japanese importers’ demand for foreign currency can increase selling pressure on the yen. Together, these forces have contributed to the yen’s prolonged weakness in currency markets.

The Bank of Japan’s Dilemma

Japan’s notoriously low interest rates were primarily aimed at ending deflation and achieving its price-stability target while supporting economic activity. Now, following a 40-year low against the dollar, Japan has been shifting toward narrowing the gap between its interest rates and those of other major central banks. This shift could support greater stability and strength for the yen over time.

The Bank of Japan is proceeding with extreme caution, knowing a misstep could have severe domestic and global repercussions, while also recognizing that further rate hikes may be important for bringing inflation under control and supporting the yen. Moving too quickly could cause the yen to strengthen sharply, reducing the profitability of carry trades and potentially prompting investors to unwind positions and sell global assets, increasing market volatility.

However, moving too slowly could leave the yen under continued pressure, contributing to higher import costs and inflation.

Japan’s Fight to Support the Yen

Japan is facing a complicated balancing act: controlling inflation while avoiding a shock to its own economy and global financial markets. As of now, Japan has begun slowly raising rates, with its latest increase in September 2026 bringing the policy rate from 1.00% to 1.25%.

On July 31, the United States and Japan coordinated a major currency intervention to counter excessive volatility and support the yen. Japan’s Ministry of Finance confirmed that it purchased yen in coordination with the U.S. Treasury. According to reporting by the Financial Times, the Federal Reserve Bank of New York sold euros to buy yen on behalf of the U.S. Treasury, with the transactions conducted through Goldman Sachs and Morgan Stanley.

However, the intervention does not eliminate the underlying forces affecting the yen, including the interest-rate differential between Japan and the United States, Japan’s high public debt burden, and continued cross-border capital flows.

The Yen Carry Trade

The yen carry trade is relatively simple: investors borrow yen at a low interest rate, convert the funds into another currency, and invest them in higher-yielding assets.

For example, you could borrow ¥100M at 1%, convert it to dollars, and invest it at 5%. That way, you profit from the interest-rate spread, so long as the yen doesn’t appreciate significantly.

Investors have been using this strategy for years. The catch is that when the yen strengthens, investors need more of their foreign-currency earnings to repay their yen-denominated loans, reducing the profitability of the trade and making yen borrowing less attractive.

This could cause large-scale liquidation of equity and debt positions as investors raise cash to buy yen and repay loans. With a large influx of demand for yen, the currency can strengthen further, creating a self-reinforcing feedback loop.

We got a glimpse of this in August 2024, when the Bank of Japan’s rate hike and a sharp strengthening of the yen helped accelerate the unwinding of leveraged carry trades, contributing to severe global market volatility. This time around, investors are closely watching the BOJ’s moves, knowing they will not be caught completely off guard. However, that does not eliminate the possibility of another carry-trade unwind.

The scale of the carry trade is massive, yet difficult to pinpoint. As of March 2026, cross-border yen borrowing reached an estimated ¥360 trillion (~$2.3 trillion), providing a rough proxy for the amount of yen funding tied to global markets. The sheer size of this borrowing means even a partial unwind could send ripples through global financial markets.

Why the Yen Matters Beyond Japan

The bigger picture is that Japan has been providing the world with an inexpensive source of capital. If Japanese interest rates rise relative to those abroad, yen-denominated investments can become more attractive, potentially drawing capital back toward Japan.

For U.S. financial markets, this could reduce demand for U.S. assets and put upward pressure on Treasury yields, while a broader carry-trade unwind could increase volatility across equity markets. As carry trades become less profitable, investors could be forced to liquidate global assets, increasing volatility across financial markets.

From an exchange-rate standpoint, a stronger yen means the dollar buys fewer yen, although it does not necessarily mean the dollar will weaken against other currencies. The potential effects therefore extend beyond Japan because changes in yen funding can transmit through global bond, equity, and currency markets.

For investors, the key question is whether Japan can normalize its financial system without triggering the kind of rapid capital movements that amplified global volatility in 2024.