Why this analyst says the yen carry trade is “a ticking time bomb”

Navamya Acharya

Sun, February 15, 2026 at 5:30 PM GMT+9 3 min read

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Investing.com – BCA Research has issued a stark warning that the Japanese yen carry trade has reached unsustainable levels and poses significant risks to global markets, though the timing of any reversal remains uncertain.

The trade, which involves borrowing in yen to purchase higher-yielding assets, has proliferated to massive proportions according to a recent note.

BCA Research estimates the outstanding value of yen forwards held by global hedge funds and principal trading companies reached ¥35 trillion as of Oct. 1, 2025, while the total value of forwards, FX swaps and currency swaps hit ¥2,281 trillion.

“The yen carry trade’s risk-reward profile is poor,” the brokerage said. “Once the yen begins appreciating, the move is likely to be outsized given how large the YCT has become.”

The analysts contend that rising Japanese interest rates will not trigger unwinding of these positions, contrary to conventional market expectations.

Instead, they argue falling prices of assets funded by yen borrowing will catalyze the reversal, citing three historical episodes in 2008, 2015 and 2020 when carry trades collapsed amid market turbulence rather than rate increases.

The yen has depreciated to 150-160 per dollar despite Japan’s central bank raising rates, with nominal and real rate differentials versus the U.S. improving.

Japanese insurance companies have hedged only 46% of their foreign asset exposure as of Sept. 30, 2025, below the 63% peak in 2020 and the 54% fifteen-year average, according to the report.

BCA Research noted that 10-year Japanese government bonds currently offer higher yields than currency-hedged 10-year bonds in the U.S., U.K. and Germany, suggesting Japanese fixed-income investors are positioned for continued yen weakness.

The brokerage traces the yen’s shift from a pro-cyclical to counter-cyclical currency to 2005, when Japan’s net foreign income began exceeding its trade surplus.

Japanese investors now hold $12 trillion in foreign assets, with portfolio assets and other investments comprising $7.4 trillion. Foreign investment income reached $240 billion last year.

“Swings in the yen are often driven by investment decisions by Japanese investors and corporations whether to reinvest or repatriate their foreign income,” the analysts said.

These allocation decisions depend primarily on global market volatility and exchange rate outlook rather than interest rate differentials, they said.

The brokerage recommended medium and long-term investors go long the yen versus the U.S. dollar. BCA Research also advised removing the dollar from short positions against the Indonesian rupiah, Philippine peso and South African rand, maintaining those shorts only against the euro and yen.

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The yen’s real effective exchange rate based on unit labor costs stands at its lowest level in over 50 years, according to data from the International Monetary Fund and OECD cited in the report.

“When yen appreciation commences, insurance companies will rush to increase their hedge ratio, bolstering the yen’s rally,” the analysts said, warning that Japanese entities will likely reduce new foreign investments, repatriate income and assets, and hedge currency risk once volatility rises.

Hyun-Song Shin, economic advisor at the Bank for International Settlements, cited ¥40 trillion for on-balance-sheet yen borrowing and $14 trillion for off-balance-sheet yen swap markets in August 2024, figures consistent with BCA’s estimates.

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