Why In News?

The United States and Japan conducted their first coordinated yen-buying intervention since 1998 after the Yen touched a 40-year low of around ¥164 per US$

What is the Japanese Yen Carry Trade?

Investors borrow Japanese Yen at very low interest rates and invest in higher-yielding assets such as US Treasuries or Indian equities to profit from the interest rate differential (carry). 

  • This strategy is supported by prolonged ultra-loose monetary policy of the Bank of Japan (BOJ). 

Investors earn the spread between Japan's low borrowing cost and higher overseas yields; however, gains disappear when the Yen appreciates sharply due to exchange-rate losses.

The Yen carry trade has long been an important source of global liquidity, influencing capital flows into emerging markets, including India.

Why is the Yen Strengthening?

BOJ Monetary Tightening: The Bank of Japan increased its policy rate to 1% (June 2026), the highest level in nearly three decades, as inflation remained above its 2% target, reducing the attractiveness of borrowing in Yen.

Higher Bond Yields: Rising Japanese Government Bond (JGB) yields have encouraged domestic investors to shift funds back to Japan, reducing overseas investments. 

Capital Repatriation: Narrowing interest-rate differentials between Japan and advanced economies encourage investors to unwind, carry trades and repatriate capital. 

Safe-Haven Demand: During periods of global uncertainty, the Yen traditionally appreciates due to its safe-haven status, increasing pressure on leveraged investors. 

Possible Impact on Indian Markets

FPI Outflows: Yen carry trade unwinding can accelerate Foreign Portfolio Investor (FPI) outflows, increasing volatility in Indian equity and debt markets. 

Equity Volatility: Rate-sensitive sectors such as mid-cap stocks, financials, auto components and technology face higher volatility due to foreign institutional selling.

Rupee Depreciation: Capital outflows increase demand for foreign currency, exerting pressure on the Indian Rupee.  

Liquidity Tightening: Global deleveraging reduces foreign liquidity available to emerging markets, increasing financing costs and market uncertainty.  

Bond Market Impact: Foreign selling may push up government bond yields, increasing borrowing costs for both the government and corporations. 

Impact on the Indian Economy

Higher Import Bill: A weaker Rupee raises the cost of crude oil, fertilizers, electronics and capital goods, worsening imported inflation. India imports over 85% of its crude oil requirement.

Inflationary Pressures: Imported inflation may constrain the RBI's monetary policy flexibility, delaying interest-rate cuts if inflation remains elevated. (

Corporate Earnings: Companies with foreign currency liabilities face higher debt-servicing costs, while export-oriented sectors may benefit from a weaker Rupee.

Growth Risks: Volatile capital flows can dampen investment, reduce business confidence and moderate GDP growth.  

External Sector Vulnerability: The RBI Financial Stability Report highlights that maintaining adequate foreign exchange reserves, prudent external debt management and macroeconomic stability are critical buffers against global financial shocks.  

Source:  INDIANEXPRESS 

PRACTICE QUESTION

Q. With reference to the "Yen Carry Trade" in international finance, consider the following statements:

  1. It involves borrowing funds in Japanese Yen at low-interest rates and investing them in higher-yielding assets of other countries.

  2. An unexpected appreciation of the Japanese Yen against global currencies improves the net profit margins of carry-trade investors.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer: (a)

Explanation:

Statement 1 is correct: The Yen carry trade is a financial strategy where investors borrow money in Japanese Yen due to Japan's historically low-interest rates. They then convert these funds into other global currencies to invest in higher-yielding assets (like bonds, equities, or higher-interest currencies) elsewhere.  

Statement 2 is incorrect: An unexpected appreciation of the Japanese Yen harms rather than improves the net profit margins of carry-trade investors. When the Yen strengthens, it requires more of the foreign currency to pay back the original Yen-denominated debt. This can wipe out investment gains and trigger a rapid, forced liquidation of assets known as a "carry trade unwind."