One of the largest and least-visible trades in global finance is back in fashion — and, with it, an old worry. As the US dollar has climbed and the Japanese yen has slid to multi-decade lows, the "yen carry trade" has become highly profitable once more. Some analysts caution that the same conditions that make it attractive also make it dangerous, MarketWatch reported.

What the carry trade is

The idea is simple, even if the scale is vast. Investors borrow money cheaply in a currency with very low interest rates — Japan, where rates have been rock-bottom for years — and use it to buy higher-yielding assets elsewhere, such as US government bonds or stocks. As long as the yen stays weak and the interest-rate gap holds, the trade earns a steady profit: you pay little to borrow and earn more on what you buy, pocketing the difference, plus any gain from a falling yen.

Because it is funded with borrowed money, the trade is a form of leverage, which magnifies both the gains and the risks.

Why it is thriving now

Two forces are pulling in the same direction. First, US interest rates remain well above Japan's, keeping the gap that makes the trade pay. Second, the yen has weakened sharply against the dollar, reaching levels not seen in decades — which both boosts the trade's returns and draws in more speculators betting the yen will keep falling.

Japan's authorities have not been passive. Japan's central bank has been gradually raising interest rates from near zero, and the government has spent heavily intervening in currency markets to try to support the yen, CNBC reported. Yet the yen has continued to slide, a sign of how strong the underlying pressure — above all the wide gap with US rates — has been.

The 2024 warning

The reason analysts watch this so closely is the memory of what happened in early August 2024. When the Bank of Japan raised rates and signaled a shift away from its ultra-loose policy, the yen jumped and the logic of the carry trade suddenly reversed. Traders rushed to unwind their positions at once — buying back yen and selling the assets they had bought with it — and the result was a violent bout of turmoil. Japan's Nikkei index suffered one of its worst single-day falls in decades, and the shock rippled through stock markets around the world before conditions stabilized.

That episode is the template for what a "blowup" looks like: not a gentle wind-down, but a stampede for the exits that feeds on itself.

Why an unwind is a risk, not a forecast

The mechanics explain the danger. Because carry positions are leveraged and widely held, a sharp move in the yen can force many investors to sell the same assets at the same time. A rallying yen — usually a sign of caution in markets — can therefore become a trigger for selling in stocks and bonds, spreading stress well beyond the currency desks where the trade lives.

Analysts differ on how big the current positions are and how likely a repeat is, and their forecasts for the yen vary widely. It is important to stress that this is a risk scenario, not a prediction: warning that conditions resemble 2024 is not the same as saying a crash is coming.

The case that it may not repeat

There are reasons to think a rerun could be avoided or milder. The August 2024 shock was a hard lesson, and traders, banks and risk managers are far more alert to the carry trade now than they were then; positions may be smaller or better hedged. A gradual, well-signaled path for US and Japanese interest rates — rather than a surprise move — would let the trade unwind more calmly. And much depends on the Federal Reserve: if US rates fall toward Japan's, the gap that powers the trade narrows on its own.

The takeaway

For most people, the yen carry trade is invisible — until it isn't. Its significance lies in the way a strategy built on cheap Japanese money is linked to prices in markets far away, so that a sudden reversal can be felt globally. Right now, a strong dollar and a weak yen are making the trade lucrative and, by the same token, rebuilding a familiar vulnerability. Whether that ends in another abrupt unwind or simply fades quietly will depend on central banks, on how crowded the trade has become, and on whether markets get the orderly adjustment they are hoping for.