What is the yen carry trade? How a 3% Japanese yield reaches the Philippines

For years Japan offered the world something unusual: money that cost almost nothing to borrow. Investors borrowed yen, swapped it into other currencies and bought assets that paid more. When Japanese rates started to rise in 2024, that trade became more fragile. In 2026 Japan’s 10-year yield passed 3%, and the question returns: what happens if it unwinds again, and what reaches the Philippines?

What is the yen carry trade?

It is borrowing in yen at a low interest rate and investing in a higher-yielding asset in another currency. The investor keeps the difference, as long as the yen does not rise too much.

Visual guide

What is the yen carry trade?

1. 11. Borrow

   What happens

   A fund or bank borrows yen, or uses yen FX swaps, at Japan’s low short-term rate

2. 22. Convert

   What happens

   The yen is sold for dollars or another currency

3. 33. Invest

   What happens

   The money goes into US Treasuries, emerging-market bonds, stocks or other assets

4. 44. Repay

   What happens

   Later the investor buys yen back to repay. If the yen has strengthened, the profit shrinks or turns into a loss

Step	What happens
1. Borrow	A fund or bank borrows yen, or uses yen FX swaps, at Japan’s low short-term rate
2. Convert	The yen is sold for dollars or another currency
3. Invest	The money goes into US Treasuries, emerging-market bonds, stocks or other assets
4. Repay	Later the investor buys yen back to repay. If the yen has strengthened, the profit shrinks or turns into a loss

Step 4 is the weak point. When many investors rush to buy yen at the same time, the yen jumps, losses grow, and they sell other assets to cover. That is how a Japanese rate move becomes a fall in stock markets far from Tokyo.

How large is it?

Nobody knows exactly, because the trade is spread across loans, bonds, swaps and derivatives. The BIS gives several figures, each measuring something different. Yen credit to non-banks outside Japan was about US$880 billion (¥133 trillion) in the first quarter of 2024. Of that, yen loans were about US$271 billion (¥41 trillion), up from ¥25 trillion in mid-2021. The notional value of yen FX swaps and forwards outstanding was US$14.2 trillion at the end of 2023.

The last figure is far larger because it counts the full face value of hedging and funding contracts, not a net position. None of these figures is “the carry trade” by itself.

What happened on 5 August 2024?

The Bank of Japan raised its rate to 0.25% on 31 July 2024. Two days later, weak US jobs data pushed investors to expect fast US rate cuts. The yen surged and carry positions were closed at once.

Market	5 August 2024
Nikkei 225	−12.40% to 31,458.42 (largest point fall on record)
VIX, US volatility index	38.57 at the close (23.39 on 2 August)
Yen per dollar	143.95, down from 161.73 on 10 July (yen +11.0%)
PSEi	−2.58% to 6,434.73
Philippine 10-year yield	6.12% (6.13% on 2 August)

Sources: Nikkei Indexes, BIS, FRED, BusinessWorld for the PSEi, ADB AsianBondsOnline for the Philippine yield (data: Bloomberg).

Philippine stocks fell, but by about a fifth as much as Tokyo. Local analysts quoted by BusinessWorld blamed US recession fears. The Philippine bond market barely moved. The BIS noted that the S&P 500 had recovered its losses by 9 August.

Where are Japanese rates in 2026?

Much higher than in 2024.

BOJ decision	Policy rate	Japan 10-year that 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%	2.981%

The policy rate of 1.25% is the highest since 1995 (Bank of Japan). Japan’s 10-year closed above 3% on 2 September 2026 for the first time since 1996 and reached 3.111% on 7 October (Ministry of Finance). The next BOJ meeting is on 29-30 October.

Why is the yen still weak?

Because borrowing yen is still much cheaper than holding dollars. The gap between US and Japanese 2-year government bond yields was 4.28 percentage points on 10 July 2024 and 3.63 on the day of the unwind. It narrowed to 2.27 by 5 January 2026, then widened again to 2.73 on 29 July and 2.86 on 6 October 2026, as the Federal Reserve turned to raising rates.

US 2-year minus Japan 2-year government bond yield, 6 October 2026 (4.28 points in July 2024)

The yen reached 163.86 per dollar on 29 July 2026, its weakest of the year. Japan’s Ministry of Finance intervened on several days between April and August 2026, about ¥27.13 trillion in total.

How fast can it turn?

Twice in 2026 the yen gained about 4% within roughly a week:

• 29 July to 3 August 2026: 163.86 to 156.96 yen per dollar (dollar −4.2%)
• 1 to 9 September 2026: 160.03 to 153.50 yen per dollar (dollar −4.1%)

Neither move came close to August 2024, when the yen gained 11% in under four weeks. But the arithmetic shows the risk: with a 2-year interest gap of 2.86 points a year, a 4% move in the yen wipes out more than a year of interest in a few days.

What reaches the Philippines?

Three routes, none of them through Filipino households borrowing yen.

The peso-yen rate. When the yen surges, the peso buys fewer yen.

Monthly average, August 2026 (₱37.13 in July 2024, before the unwind)

Month	Pesos per 100 yen (monthly average)
July 2024	₱37.13
August 2024	₱38.94
December 2025	₱37.76
June 2026	₱38.05
August 2026	₱38.68

From July to August 2024 the cost of 100 yen rose by about 4.9%. That affects school fees in Japan, travel to Japan and yen-priced imports, and it raises the peso value of money sent home from Japan.

Global risk appetite. The PSEi fell 2.58% on 5 August 2024. The 2024 episode suggests that a future unwind could move Philippine stocks as well, through global risk appetite rather than anything local.

Trade. Japan bought US$856.6 million of Philippine goods in July 2026, 10.5% of exports, fourth after the United States, Hong Kong and China (PSA data). A stronger yen makes Philippine goods cheaper for Japanese buyers.

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