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🇰🇷 South Korea /Economy & Trade

Asian Markets Watch the Bank of Japan as Yen Carry-Trade Unwind Fears Return

From Hankyoreh · () Korean

Translated from Korean and summarized by DistantNews. Read the original for the full story.

At a glance

News Named sources Ongoing story
  • Asian stock markets briefly fell sharply before rebounding as investors reacted to renewed concern about a possible yen carry-trade unwind.
  • The Bank of Japan is widely expected to raise its policy rate at its Sept. 18 meeting, with some Japanese media discussing a 50-basis-point increase.
  • Analysts say the risk of a repeat of the 2024 market shock appears limited for now, but yen-funded capital flows warrant monitoring.

Asian markets moved sharply on Sept. 3, dropping almost at once before recovering about 30 minutes later. The sudden swings revived concern that a stronger yen could force investors to unwind trades funded with cheap Japanese borrowing.

The Bank of Japan will hold its monetary policy meeting on Sept. 18. Markets widely expect another increase in the policy rate, currently 1%, already its highest level since 1995. Some Japanese media have reported that officials could consider a 50-basis-point “big step,” adding to sensitivity across regional markets.

The carry trade is not at a level that would trigger an unwind, but the market appears to have priced in this concern during the session because of the stronger yen.

· Lee Sang-heonThe iM Securities analyst explained the sharp intraday market moves.

A yen carry trade involves borrowing yen at low interest rates and investing the proceeds in higher-yielding overseas assets such as stocks and bonds. The strategy becomes less attractive when Japanese rates rise, the gap with U.S. rates narrows, or the yen strengthens. Investors may then sell those assets, buy back yen and repay their borrowing, potentially creating selling pressure across global markets.

With yen carry-trade positions again accumulating on a large scale, concern has grown that Japan’s additional monetary tightening could fundamentally change the global low-cost funding environment.

· Song Min-kiThe Korea Institute of Finance senior researcher assessed the risk to global and Korean markets.

The article points to speculative net short yen futures positions as a gauge of carry-trade exposure. The position reached 163,000 net short contracts on July 28, close to the 184,000 recorded in July 2024, when a rapid unwind followed a Bank of Japan rate increase. With each standard yen futures contract representing 12.5 million yen, the outstanding net short position exceeded 2 trillion yen. HSBC estimates the global yen carry trade at more than $1 trillion.

The 2024 episode sent South Korea’s markets sharply lower. On Aug. 5, the Kospi fell 8.8% and the Kosdaq dropped 11.3%, triggering circuit breakers, while Tokyo stocks fell 12%. Analysts said a similar shock currently appears less likely, partly because the Bank of Japan is aware of the earlier risks and may move cautiously. Still, they urged monitoring the impact on Korean markets through global asset prices and foreign capital flows.

The possibility of a large-scale yen carry-trade unwinding shock like that of August 2024 is currently considered relatively limited, but its effects on our financial markets need to be monitored.

· Song Min-kiSong described the current risk assessment and the need to watch capital flows.
About this summary

Originally published by Hankyoreh in Korean. Translated, summarized, and contextualized automatically by DistantNews, with a note on how the source frames the story. Not individually reviewed before publishing. How this works.

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