What Is the Yen Carry Trade? The $4tn Risk in Your ETF
Your global tracker is partly funded by a $4tn bet most UK investors have never heard of. In August 2024 it unwound for one day. Your portfolio felt it. The next one is building.
5 August 2024: one-day moves as the carry trade unwound
Recovery: Nikkei back near pre-crash levels by mid-September. Passive investors who did nothing came out unscathed.
What an unwind hits in a UK portfolio
| Asset | Direction | Why |
|---|---|---|
| Global equity tracker | Down sharply | Forced selling to raise yen |
| US Treasuries / UK gilts | Yields up, prices down | Carry-trade was a quiet buyer |
| Sterling vs yen | Down 5%+ in 24hrs | Borrowers scramble to buy yen back |
| Long-term fundamentals | Unchanged | Liquidity event, not a solvency event |
Carry-trade gross exposure peaked around $3 to $4 trillion before the August 2024 unwind.
Key takeaways
The yen carry trade is a strategy where investors borrow Japanese yen at near-zero interest rates and use the proceeds to buy higher-yielding assets in other currencies. It has quietly funded a slice of global asset prices for two decades.
When the trade unwinds, it does so violently. The August 2024 episode saw the Nikkei fall 12% in a single day, the worst drop since 1987, with global equities, the dollar and risk assets dragged down with it.
You do not need to trade the yen to be affected. If you hold a global index fund, an unwind shows up as a sharp drawdown in your portfolio, usually followed by a recovery within weeks or months.
The right response for a long-term UK investor is not to time the next unwind. It is to hold a globally diversified portfolio, keep contributions automatic, and ignore the noise when it comes.