The Yen Carry Trade Is Unwinding – But This Isn’t 2008

Wall Street just logged its best Thanksgiving week since 2012. The Dow jumped 2.7%, the S&P 500 3.7%, and the Nasdaq 4.4% – a holiday surge powered by rate-cut fever and a burst of optimism.

And then, just as December cheer took hold, an old ghost returned. The yen carry trade began to unwind, spooking traders and knocking markets off balance.

“Japan is breaking the global financial system!” “This could be another Lehman!”

Suddenly, Japan is at the center of the world’s financial anxiety. Its central bank may finally raise rates after decades near zero; and that single shift could rattle everything from Bitcoin (BTC/USD) to the S&P.

Here’s why: for years, investors have borrowed cheap yen to chase higher-yielding assets – U.S. stocks, Treasurys, even crypto. But when the yen strengthens and borrowing costs rise, that ‘free-money’ trade flips.

Traders start selling to unwind, dumping BTC and equities to repay yen loans. The same fuel that inflated asset prices on the way up is now burning off on the way down.

Yes, that’s a real risk. But it’s not a repeat of 2008. And it’s definitely not signaling the end of the AI boom.

Let’s break down what’s really happening – calmly, and in plain English…

What Is the Yen Carry Trade – And Why It Fueled Markets for Decades

For more than two decades, Japan ran the cheapest money machine in the world.

While interest rates fluctuated in the U.S., Europe, and emerging markets, Japan stayed near zero – and often below it – creating an enticing opportunity:

• Borrow yen at near-zero interest.
• Convert those yen into dollars.
• Invest the money into higher-return assets like U.S. Treasuries, high-growth tech stocks, and cryptos.

If you can borrow at ~0% and earn 5- to 10% elsewhere, you pocket the difference. That difference is the ‘carry’ – hence, the yen carry trade.

It was one of the most profitable, low-stress macro trades for years. And like all long-running, low-volatility trades, it attracted hedge funds, proprietary trading desks, structured products, global macro portfolios, and even corporate treasury strategies.

The longer it worked, the bigger it got.

What Changed: Japanese Rate Hikes and the Trigger for the Unwind

But with Japanese inflation proving sticky, the Bank of Japan is hiking rates and pulling back bond purchases. 

Japanese bond yields are now ripping to their highest levels since 2008, blowing a hole in the carry-trade math. Funding costs are no longer basically zero. Suddenly, what used to be a sleepy money-printing machine is a real threat.

And that creates “unwind” risk:

1. Investors who borrowed yen to buy foreign assets now face higher funding costs and the risk that the yen strengthens versus the dollar.
2. If the yen strengthens, their debt becomes more expensive to repay in dollar terms.
3. To reduce risk, they do the only thing they can: sell the assets they bought, convert dollars back into yen, and pay down liabilities.
4. That selling hits U.S. equities, emerging markets, crypto, treasuries, and anything that had heavy foreign macro participation.

Clearly, there are legitimate reasons why folks are anxious about this – especially because the yen carry trade is quite large.

How a Yen Trade Unwind Can Ripple Through Stocks, Crypto and Global Liquidity

We don’t have perfect transparency, but conservative estimates put the core leveraged carry trade in the hundreds of billions, with broader yen-funded exposure in the low trillions.

That’s enough size to create real selling pressure, move prices meaningfully, and temporarily tighten global liquidity.

Plus, the transition could be violent. 

That is, carry trades unwind violently when volatility rises, funding costs spike, currency moves become unstable, and margin calls trigger cascades. 

Those cascades can feel sudden, sharp, and emotionally brutal on price charts. Just look at the nosedive Bitcoin took over the last few days.

And importantly, this unwind is hitting a time when markets are really crowded on the long side. Everyone is already long tech, AI, and crypto. The yen carry trade was one of the hidden fuel sources supporting those trades; and removing even part of that fuel causes turbulence.

So, yes, this is a real macro stressor.

But here’s the key part most people miss…