The Yen Carry Trade: What the Rate Gap Is Worth

Japanese interest rates have been close to zero for most of thirty years. The yen carry trade is the position built on that fact: borrow in yen, hold something that pays more.

On one-year rates the gap it feeds on reached 5.56 percentage points for a single day in July 2023. It was zero as recently as 2011. This guide sets out what the position is, what the gap has actually been worth and what takes it away.

A position with three legs, held for as long as two rates stay apart.

The first leg borrows yen. The second converts them into another currency and buys something that pays a higher rate. The third reverses both at the end. What is left is the difference between the two interest rates, plus or minus whatever the exchange rate did in between.

A BIS Quarterly Review box gives the general form: "a leveraged cross-currency position designed to take advantage of interest rate differentials and low volatility". BIS is the Bank for International Settlements, which is the central banks' own bank.

Chart 1 is the gap that makes the yen version work: the United States one-year Treasury yield less the Japanese one-year government bond yield, every month since 1998, as the average of the daily gap.

The gap is usually wide. It is not always there.

On daily readings it reached 5.56 points on 11 July 2023, the widest since 2010. The monthly average the chart plots went higher in May 2000, at 6.13. In September 2011 it averaged zero. In December 2021 it averaged 0.41.

Our guide to the dollar against the yen covers the two-year version of this gap and what it does to the exchange rate. Its figures are two-year rates, so they differ from the one-year numbers here.

The yen is the currency this is done in because of "the relatively low interest rates in Japan vis-à-vis in other advanced economies". An International Monetary Fund (IMF) paper says those rates have "driven the yen as the preferred funding currency over others".

Anything from a 13% loss to a 17% gain, depending on the currency.

Source: Federal Reserve H.15 and H.10; Ministry of Finance Japan; YX Insights

The table takes five one-year windows. Each borrows yen at Japan's one-year yield, converts at the rate that day, holds a one-year US Treasury, then converts back and repays. These are illustrations built from official series, with no extra borrowing and before any cost. The borrowing cost is the government yield, not what anyone pays in practice.

Every currency figure here is the move in the dollar against the yen, which is what the arithmetic uses. The legs compound, so they do not simply add: a 17.05% fall in the dollar turns 4.80 points of interest into a 13.16% loss.

The 1998 window started with a gap of 4.80 points. The dollar fell 17.05% against the yen over the year, so the position lost 13.16%.

The 2007 window started at 4.08 points. The dollar fell 13.96% and the position lost 10.56%.

The two that worked ran the other way. From 30 December 2021 the gap was only 0.47 points, but the dollar rose 14.45% and the position made 14.97%. From December 2023 a gap of 4.82 and a rise of 11.60% in the dollar together made 16.97%.

So in four of the five windows the currency mattered more than the gap did. Only the last one, from July 2024, is the trade working as designed: a gap of 4.46 points, an exchange rate that barely moved, a return of 4.61%.

A fall in the dollar against the yen about the size of the gap.

Each row of the table carries a break-even: how far the dollar can fall before the carry is gone. It sits a little below the gap, because the legs compound.

From December 2023, with the gap at its widest in the set at 4.82 points, the break-even was 4.60%. From December 2021, with the gap at 0.47 points, it was 0.47%.

Chart 2 sets each window's currency move against what the position returned. The gap sets the starting point. The currency moves the return far above or below it. In two of the five windows it took the position well into loss.

A BIS bulletin describes the strategy as generating "small but consistent returns at times of market calm", while quickly generating "steep losses as turbulence erupts". The BIS Quarterly Review of 2007 put the mechanism plainly: when a sudden unwinding happens, "there is a tendency for target currencies to depreciate and funding currencies to appreciate sharply".

The dollar went from 150.38 yen on 31 July 2024 to 143.95 on 5 August, a fall of 4.3%, which is roughly one year of that window's carry in three trading days.

No official statistic measures it directly.

Tracking the size "is notoriously difficult". The BIS statistics record yen borrowed from banks or through derivatives, but "they do not reveal specific uses, the carry trade being just one of many".

The measurement problem has a specific cause. The textbook version borrows yen on a balance sheet, where it can be counted. The version a BIS Quarterly Review box calls more common uses derivatives instead, which require "no on-balance sheet borrowing of the funding currency", so it does not show up as borrowing in the statistics.

Chart 3 shows the nearest measured thing: yen-denominated credit to non-bank borrowers outside Japan, which the BIS does publish. It was 45.44 trillion yen in the second quarter of 2021 and 65.91 trillion in the first of 2026, a rise of 45.0%, down from 69.30 trillion at the end of 2024.

That series is not the carry trade. It counts every yen loan and yen bond held by a non-bank outside Japan, whatever it was for. It misses the derivative positions entirely.

Estimates exist. They point in opposite directions. A BIS bulletin published its own as "biased down". An International Monetary Fund paper offered a measure of much the same kind as a guide to "an upper bound". They are not even sizing the same thing, which is reason enough to print neither.

The gap that pays for the trade is public and is measured every day. The size of the position built on it is not. What the five windows show is that the gap is the smaller half of the answer: the currency decided the result in four of them.

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This explainer is part of the YX Insights Academy. Each one takes a single idea and checks it against real data.

The same approach runs through everything else we publish:

Good places to start on the website:

Borrowing money in yen, where interest rates are low, then holding an asset in a currency that pays more. The return is the difference between the two rates, adjusted for whatever the exchange rate does in the meantime. A BIS bulletin calls the yen "the predominant carry trade funding currency".

Whatever the interest gap is, but the exchange rate decides the result. Between the US and Japanese one-year rates that gap reached 5.56 percentage points on 11 July 2023 and averaged zero in September 2011. In the year from January 1998 a gap of 4.80 points still produced a loss of 13.16%, because the dollar fell 17.05% against the yen.

Because a small move in the exchange rate cancels a year of interest. A gap of 4 to 5 percentage points is wiped out by a fall in the dollar against the yen of about the same size. The BIS Quarterly Review of 2007 recorded that when positions unwind, funding currencies tend to "appreciate sharply".

No official statistic measures it directly. A BIS bulletin calls tracking the size "notoriously difficult", partly because much of the position is built with derivatives that involve no recorded borrowing. The nearest measured figure is yen credit to non-banks outside Japan, 65.91 trillion yen in early 2026. It counts a great deal that has nothing to do with carry trades.

DISCLAIMER: This article is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.