MW Why the Japanese yen trading back toward its lows for the year could be important for markets

By Jules Rimmer

The yen is an important funding currency for risk-on trades.

Japan's Prime Minister Sanae Takaichi $(R)$ and Bank of Japan Governor Kazuo Ueda (L) Photo by STR/JIJI Press/AFP via Getty Images

The Japanese yen has slumped to a 10-month low - and it's getting to a point where Japanese authorities may have to act.

In his daily research note, market strategist David Rosenberg predicted the Bank of Japan is on the cusp of having to change policy to stabilize its currency.

Why does this matter to risky assets?

The Japanese are very big savers and the yen is a major funding currency for the carry trade - whereby investors short the low-yielding, generally depreciating yen to fund riskier wagers on other assets in other currencies - and its weakness since spring has partly boosted demand for tech and AI-related stocks in America. A falling yen is usually associated with risk-on sentiment.

If Rosenberg is right and "odds of some policy action or communication to stabilize the yen are rising," then this could presage a major trading reversal. This is precisely what happened in August 2024 when the carry-trade blew up. The S&P 500 SPX fell as much as 6% that month, though it did end the month with a 2.3% gain.

Many of President Trump's new trade policies outlined in April were designed to coerce Asian exporters into allowing their currencies, notably the yen, to appreciate. The Bank of Japan has thus far resisted the demands of Treasury Secretary Bessent to hike interest rates. Moreover the downtrend in the yen that began in April has begun to accelerate of late.

The problem is not just rising Japanese inflation and the BoJ's unwillingness to hike rates in response, but also the recent diplomatic spat with China. Provoked by new Prime Minister Sanae Takaichi's comments about supporting Taiwan militarily in the event of a conflict with China have led to hostile rhetoric from the Chinese government and led to a boycott on tourism to Japan as well as other economic threats, such as a ban on imports of Japanese seafood. Chinese tourists represent 25% of the foreign spend in Japan.

Moreover, Japan's borrowing costs also look set to swell as Takaichi is expected to unveil a major stimulus package this week after she was elected on a manifesto promising a large fiscal spending package. Yields have been rising and those on the ten-year Japanese government bonds BX:TMBMKJP-10Y are now at a 17-year high, after a disappointing auction Wednesday. Debt sustainability, a key concern for fixed-income investors worldwide, is a major worry for Japanese investors.

Taking the opposite view, the strategist Jeroen Blokland in a posting on X, predicted that the carry trade is set to continue because for Japan to keep up with their interest payments on their record borrowing the Bank of Japan will be forced to operate yield-curve control.

If Japan's interest rates rise, then the cost of financing its debt would be insupportable, forcing them to adopy yield curve control, argues Jeroen Blokland.

This strategy involves the central bank artificially repressing bond yields in the market. The Bank of Japan ended its yield-curve control policy in 2024.

-Jules Rimmer

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November 19, 2025 09:46 ET (14:46 GMT)

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