What Is the Yen Carry Trade? The $4tn Risk in Your ETF

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.