Yen carry trade explained: Japan at 3% and what it means for Malaysia
How the yen carry trade works, how big it is, why the KLCI fell 4.63% on 5 August 2024 when it unwound, what the Bank of Japan has done in 2026, and how the ringgit has moved against the yen.
For decades Japan offered the cheapest money in the developed world. Borrowing it and investing elsewhere became a standard trade. In 2026 Japanese yields have passed 3%, and the question is whether that trade unwinds again, as it did in August 2024 when Bursa Malaysia had its worst day in more than four years.
What is the yen carry trade?
It is a bet on an interest gap, in four steps.
What is the yen carry trade?
- 1. Borrow
- What happens
- Borrow yen at a low Japanese rate
- Risk
- Japanese rates rise
- 2. Convert
- What happens
- Sell the yen for US dollars or other currencies
- 3. Invest
- What happens
- Buy higher-yielding bonds, shares or other assets
- Risk
- Asset prices fall
- 4. Repay
- What happens
- Convert back to yen and repay
- Risk
- The yen rises, so repayment costs more
Selected entries from the table below. Its dates, units, definitions and limitations still apply.
| Step | What happens | Risk |
|---|---|---|
| 1. Borrow | Borrow yen at a low Japanese rate | Japanese rates rise |
| 2. Convert | Sell the yen for US dollars or other currencies | |
| 3. Invest | Buy higher-yielding bonds, shares or other assets | Asset prices fall |
| 4. Repay | Convert back to yen and repay | The yen rises, so repayment costs more |
The trade earns small, steady gains while the yen is weak and quiet. When the yen rises quickly, many holders repay at once, which pushes the yen up further and forces sales of whatever they bought.
How big is it?
Nobody knows exactly, because the trade does not have to be booked as a yen loan. The BIS Quarterly Review of September 2024 gave several measures.
| Measure (BIS) | Size |
|---|---|
| Yen credit to non-banks outside Japan (2024 Q1) | about US$880 billion (¥133 trillion) |
| Of which yen loans | about US$271 billion (¥41 trillion), up from ¥25 trillion in 2021 Q2 |
| Notional yen FX swaps and forwards (end-2023) | US$14.2 trillion |
The last figure is much larger because it includes hedging and ordinary trade finance, not only speculation. Treat the range as the answer.
What happened on 5 August 2024?
The Bank of Japan raised rates on 31 July 2024, US data weakened, and the yen jumped. Positions were cut across markets in a few days.
| Measure | Move |
|---|---|
| Nikkei 225, 5 August 2024 | −12.40% to 31,458.42 (Nikkei) |
| VIX close | 38.57, from 23.39 on 2 August |
| USD/JPY, 10 July to 5 August | 161.73 to 143.95 (−11.0%) |
| FBM KLCI, 5 August 2024 | −74.57 points or −4.63% to 1,536.48, from 1,611.05 |
| USD/MYR monthly average, July to August 2024 | 4.6796 to 4.4174 (ringgit stronger) |
| Ringgit per 100 yen, July to August 2024 | 2.9708 to 3.0202 (ringgit weaker) |
The KLCI figures are as reported by The Star and The Edge, which called it the worst day since March 2020. The ringgit pattern is the interesting part for Malaysia: it gained against the dollar and lost against the yen in the same month.
FBM KLCI on 5 August 2024, the day the yen carry unwind peaked (as reported by local media)
How far have Japanese rates risen in 2026?
| Bank of Japan decision | Policy rate | 10-year JGB on the day |
|---|---|---|
| 19 March 2024 | End of negative rates | 0.744% |
| 31 July 2024 | 0.25% | 1.07% |
| 24 January 2025 | 0.5% | 1.238% |
| 19 December 2025 | 0.75% | 2.021% |
| 16 June 2026 | 1.0% | 2.655% |
| 18 September 2026 | 1.25% (7-2 vote, highest since 1995) | 2.981% |
Source: Bank of Japan, Ministry of Finance Japan. The 10-year JGB first closed above 3% on 2 September 2026 (3.006%) and reached 3.111% on 7 October. The next meeting is on 29-30 October.
Why is the yen still weak?
Because the gap with the United States is still wide. What matters for a short-term carry trade is the 2-year yield difference.
| Date | US 2-year minus Japan 2-year |
|---|---|
| 10 July 2024 | 4.28 points |
| 5 August 2024 | 3.63 points |
| 5 January 2026 | 2.27 points |
| 29 July 2026 | 2.73 points |
| 6 October 2026 | 2.86 points |
The gap narrowed for 18 months, then widened again as US yields rose in 2026. Japan’s Ministry of Finance intervened to support the yen several times in 2026, about ¥27.13 trillion in total, which shows how much pressure remains.
The risk is speed, not level
Two episodes in 2026 show how fast the yen can move:
- 29 July to 3 August 2026: USD/JPY from 163.86 (the year’s high) to 156.96, −4.2%.
- 1 to 9 September 2026: from 160.03 to 153.50, −4.1%.
Neither turned into an August 2024-type sell-off. A rising Japanese rate alone is not the trigger; a fast yen move combined with a shock elsewhere is.
What reaches Malaysia?
| Ringgit per 100 yen (monthly average) | Value |
|---|---|
| July 2024 | 2.9708 |
| August 2024 | 3.0202 |
| December 2025 | 2.6244 |
| June 2026 | 2.5364 |
| August 2026 | 2.5614 |
Three channels matter for Malaysian readers:
- Equities. The KLCI fell 4.63% in 2024 with no Malaysian trigger. A fast unwind tends to hit every market with foreign holders, regardless of local conditions.
- The ringgit against the yen. In August 2024 it weakened against the yen even while strengthening against the dollar. Today 100 yen costs about 15% fewer ringgit than two years ago, which helps Malaysians paying in yen, from travel to Japanese-sourced imports.
- US yields. Japanese investors cut US Treasury holdings from US$1.2393 trillion in February 2026 to US$1.1039 trillion in July (US Treasury TIC). Higher US yields feed into the gap with Malaysian yields, covered in the note on the US yield gap and the ringgit.
Test how a sharp fall changes long-term growth →
The size of the carry trade depends on the definition; the BIS figures are for early 2024 and are not updated monthly. The KLCI fall is as reported by two news outlets, not taken from the index provider. Exchange rates here are monthly averages. The 2024 sell-off had several causes, and the share due to carry positions cannot be measured.
Questions & answers
What is the yen carry trade in simple terms?
Borrowing in yen, where interest rates have been near zero for decades, and investing the money in higher-yielding assets elsewhere. The profit is the interest gap, as long as the yen does not rise sharply before the loan is repaid.
Did the yen carry unwind affect Bursa Malaysia?
Yes, on 5 August 2024 the FBM KLCI fell 74.57 points or 4.63% to 1,536.48, as reported by The Star and The Edge. It was part of a global sell-off in which the Nikkei 225 fell 12.40%. How much of the KLCI fall came from carry positions specifically cannot be measured from public data.
Is the ringgit stronger or weaker against the yen now?
Stronger than two years ago. The monthly average was 3.0202 ringgit per 100 yen in August 2024 and 2.5614 in August 2026, so 100 yen costs about 15% fewer ringgit.
Why is the yen still weak if Japanese rates are rising?
Because US rates are still much higher. The US-Japan 2-year yield gap narrowed from 4.28 points in July 2024 to 2.27 in January 2026, then widened again to 2.86 on 6 October 2026 after US yields rose.
Source
- Bank of Japan - Statements on monetary policy, 2026 ↗
- Ministry of Finance Japan - JGB interest rates ↗
- BIS Quarterly Review, September 2024 - The market turbulence and carry trade unwind of August 2024 ↗
- BIS Bulletin No 90 ↗
- Nikkei Indexes - Nikkei 225 historical records ↗
- The Star - Black Monday hits Bursa: FBM KLCI dives 74 points (5 August 2024) ↗
- The Edge Malaysia - KLCI sheds 4.63% on worst day since March 2020 ↗
- Ministry of Finance Japan - Foreign exchange intervention operations ↗
- OpenDOSM - Exchange rates (BNM 12:00 middle rates, monthly average) ↗
- US Treasury - TIC Major foreign holders of Treasury securities ↗