BoJ policy uncertainty and the carry trade risk: echoes of August 2024
The macro backdrop is further complicated by the Bank of Japan’s (BoJ) evolving policy trajectory. At the April meeting, three of the nine board members voted to raise rates — the most divided outcome since 2016. Governor Ueda has since sharpened his tone, cautioning that a temporary energy shock can become entrenched if it feeds through to wages, inflation expectations, and broader price-setting behaviour. A 25-basis point rate increase at the 15–16 June policy meeting now appears highly probable absent a material escalation in the prevailing conflict.
The more consequential question is what follows the June decision. Market participants are currently divided on whether the BoJ will proceed with additional rate hikes in the months ahead. Should the Bank adopt a hawkish tone signalling a higher probability of further tightening to address inflation and yen weakness, the risk of a sharp unwinding of global carry trades would rise significantly. Carry trades involve borrowing a lower-yielding currency — in this instance the yen — to fund positions in higher-yielding assets elsewhere, with returns derived from the interest rate differential.
Commodity Futures Trading Commission (CFTC) data on speculative positioning shows net short yen positions at $10.1 billion — a level last observed in July 2024, when coordinated Japanese government intervention triggered an initial carry trade unwind that was subsequently and dramatically accelerated by the BoJ’s rate hike on 31 July of that year.
The structural setup closely resembles the 2024 episode. With the yen funding a substantial volume of cross-currency positions, a more aggressive tightening path than markets currently anticipate carries the potential to inflict significant collateral damage well beyond Japan’s borders — as demonstrated in August 2024.