Yen carry trade: two years after the August 5, 2024 shock
The joint US-Japan intervention of July 2026 confirms that structural vulnerability has not disappeared — it has merely evolved
- On August 5, 2024, the Nikkei collapsed 12.4% in a single session — the yen carry trade shock. Two years later, on July 31, 2026, the US and Japan conducted their first joint FX intervention in 30 years.
- USD/JPY neared 164 (weakest since 1986) before stabilising around 156–157 post-intervention. Speculative short yen positions had reached a 9-year high in June 2026.
- The BOJ holds rates at 1.0% (1995 levels) versus the Fed at 3.50–3.75%: the 250–275 bp differential continues to fuel the carry trade.
- Until the BOJ credibly moves toward 2%, the yen remains structurally vulnerable — intervention is a palliative, not a bulwark.
- Portfolio implications: reduce exposure to Japanese exporters, maintain gold as a hedge, monitor the VIX as an early warning signal.
August 5, 2024: the anatomy of a shock
Exactly two years ago, global financial markets shook with a seismic event that few had anticipated in its full magnitude. In a single session, the Nikkei 225 fell 12.4% — its worst performance since Black Monday 1987. Within hours, nearly $400 billion in market capitalisation vanished from the Tokyo Stock Exchange. European and American markets shuddered in sympathy, the VIX spiking beyond 65.
The catalyst: the Bank of Japan (BOJ), under Governor Kazuo Ueda, raised its policy rate from 0.1% to 0.25% — a modest move on paper, but explosive in its consequences. Years of ultra-accommodative monetary policy had allowed investors worldwide to borrow heavily in yen at near-zero rates to invest in higher-yielding, riskier assets — US equities, emerging market bonds, cryptocurrencies. This mechanism, known as the carry trade, rested on a fundamental premise: the BOJ would not move.
When it did move, the unwind was brutal. Short yen positions were liquidated in a rush, strengthening the yen and mechanically depressing the assets bought with those borrowings. A structural liquidity imbalance, built silently over years, unwound in hours.
“The carry trade does not die — it changes shape. Every time markets conclude it cannot reverse, it grows larger. And the larger it grows, the more violent the reversal.”
George Saravelos, Head of FX Research, Deutsche Bank
2026: the carry trade has evolved, not disappeared
Two years after the shock, the scorecard is paradoxical. On one side, resilience: the Nikkei trades around 63,000 points, more than double its August 2024 lows. Markets absorbed the shock, central banks intervened, global liquidity did not seize up. On the other, persistent vulnerability: speculative short yen positions reached a nine-year high in June 2026. The lesson of 2024 was not retained — or rather, it was misread.
For the rate differential between the United States and Japan remains colossal. The Fed holds rates at 3.50–3.75% for a fifth consecutive meeting; the BOJ is at 1.0% — a gap of 250 to 275 basis points. In this environment, borrowing in yen to invest in dollars remains an attractive operation as long as currency volatility stays contained. This is precisely what happened: markets concluded that the risk was manageable, and positions were rebuilt.
Until late July 2026. On July 31, the dollar-yen crossed 163.80 — its weakest level since 1986. Markets were testing the authorities. The response was unprecedented: the United States and Japan intervened jointly in currency markets, a bilateral cooperation of the sort not seen since the Plaza Accord of 1985. Treasury Secretary Scott Bessent confirmed US participation, describing the intervention as a response to “disorderly yen movements.”
The BOJ in a bind: inflation, growth and the yen
The Bank of Japan faces a trilemma rarely articulated with such acuity. Its policy rate of 1.0% represents its highest level since 1995, yet remains insufficient to reduce the incentive for the carry trade. Hawkish BOJ member Naoki Tamura is explicitly advocating a neutral rate of 2.0% — a trajectory that, if followed, would mechanically narrow the differential with the Fed and lend credible support to the yen.
But Japanese growth does not accommodate such ambition. GDP growth in 2026 is revised down to +0.6%. Inflation, while above target, has been revised down to 2.5% (from 2.8% projected). In this context, aggressive rate hikes would represent a macroeconomic risk the BOJ is reluctant to take. Governor Ueda walks a tightrope: hike too quickly and growth collapses; hike too slowly and the yen continues to depreciate, feeding imported inflation and diplomatic tensions.
The joint intervention of July 31 has arrested the yen’s decline in the short term. On August 3, Washington and Tokyo confirmed they were “prepared to intervene again.” But analysts at ING have stated clearly: without an aggressive BOJ rate path, USD/JPY could quickly resume its trajectory toward 160. The intervention addresses the symptom, not the cause.
| Indicator | Japan | United States | Eurozone |
|---|---|---|---|
| Policy rate | 1.0% | 3.50–3.75% | 2.25% |
| Inflation 2026 | 2.5% | 2.8% | 2.1% |
| GDP growth 2026 | +0.6% | +1.8% | +0.9% |
| Carry spread vs JPY | — | +250–275 bp | +125 bp |
| Nikkei YTD | +18% | +10% | +14% |
Implications for wealth portfolios
For an investor exposed to international assets, the yen dossier raises three concrete questions. The first is direct Japan exposure: the Nikkei at 63,000 protects investors in yen, but not in euros. Post-intervention yen appreciation compressed returns on Japan equity funds denominated in EUR by 3 to 4% within days. On a 5% portfolio allocation, this slippage is material.
The second question concerns indirect exposure through Japanese exporters present in global ETFs. SoftBank, Toyota, Mitsubishi UFJ appear in virtually all major indices; they suffer mechanically when the yen appreciates, as their export margins are compressed instantaneously. During the week of August 3, SoftBank fell –2.4%, Advantest –2.2%.
The third question is systemic contagion. In August 2024, the carry trade unwind hit cryptocurrencies (–18% in 48 hours), US small caps and emerging markets independently of their fundamentals. If USD/JPY were to resume its trajectory toward 160–163 without intervention, a new forced unwind could trigger a similar wave of liquidations across asset classes with no fundamental connection to Japan.
Watch the VIX
The VIX is the first signal of a forced carry unwind. In August 2024, it crossed 65 before major indices corrected. Any move above 25 warrants a reduction in equity risk.
Reduce Japan Exporters
Underweight Japanese issuers heavily reliant on exports. Prefer domestic Japanese names (retail, healthcare) less sensitive to yen appreciation.
Gold as a Hedge
Gold remains the natural hedge against volatility episodes driven by carry trade dynamics. It decouples from risk assets during forced unwinds and benefits from concurrent geopolitical uncertainty.
- The August 5, 2024 shock did not eliminate the yen carry trade — it temporarily reduced it. Two years on, short yen positions had reached a 9-year high.
- The joint US-Japan intervention of July 31, 2026 is historic (first in 30 years), but remains a palliative so long as the BOJ does not credibly move toward 2%.
- The 250–275 bp rate differential between the Fed and the BOJ remains the structural engine of the carry trade — watch any BOJ announcement in September.
- Three portfolio levers: the VIX as an early warning signal, underweighting Japanese exporters, maintaining gold at 5–7% as a systemic hedge.
- A return toward USD/JPY 160–163 without intervention would likely trigger a new wave of liquidations, with contagion to asset classes bearing no fundamental link to Japan.
This document is provided for informational purposes only and does not constitute investment advice, a personalised recommendation, or an offer to buy or sell financial instruments. Past performance is not indicative of future results. All investments involve risks, including the risk of loss of capital. The information contained in this article reflects Riviera Wealth Management’s analysis at the date of publication and is subject to change. Riviera Wealth Management is an independent financial investment adviser (CIF), registered with ORIAS and a member of CNCGP.
