Is Japan’s new stimulus era fuelling the next global carry trade boom?
Yes - Japan’s expansionary fiscal stance and ultra-low interest rates could revive the global carry trade, according to analysts. With the yen falling to seven-month lows and USD/JPY with breakout above 151, traders are once again borrowing yen to chase higher-yielding assets. Tokyo now faces growing pressure to defend its currency as markets eye 155 as the next milestone. Unless the Bank of Japan (BoJ) pivots to a tighter policy or intervenes directly, yen-funded trades could keep powering global risk appetite through 2025.
Key takeaways
- USD/JPY hits a seven-month high above 151.00 amid renewed yen weakness and global risk-on sentiment.
- Sanae Takaichi’s pro-stimulus policies raise expectations of large-scale fiscal spending, delaying BoJ tightening.
- Carry trade activity resurges, as investors borrow yen cheaply to invest in higher-yield assets abroad.
- Tokyo warns of excessive volatility, but markets continue testing Japan’s intervention threshold.
- USD/JPY could test 155, barring a sharp BoJ shift or coordinated government intervention.
Japan fiscal stimulus 2025 and the yen’s slide
Japan’s political shift is driving fresh downward pressure on the yen. Following Sanae Takaichi’s election as the new leader of the Liberal Democratic Party (LDP), investors expect her government to boost public spending to support growth.
While this strategy could stimulate the economy, it raises fiscal sustainability concerns and complicates the BoJ’s inflation-control efforts. Japan’s inflation stood at 2.7% in August, still above the 2% target, suggesting policy should stay tight.
Japan’s Inflation rate
Yet, expectations are moving in the opposite direction: markets now see only a 26% chance of a BoJ rate hike by 30 October, down from 60% before Takaichi’s win.
Bank of Japan interest rates
This shift in outlook has made yen-denominated investments less appealing and fuelled capital outflows into higher-yielding markets, accelerating the currency’s decline.
The Japanese yen carry trade infocus as Takaichi Jolts Markets
The carry trade is back at the centre of market attention. With Japan’s rates anchored near zero, traders are borrowing yen to buy assets in economies with higher yields - such as the U.S. or Australia.
This strategy flourishes when global risk appetite is high, and 2025’s rally in equities has provided the perfect backdrop. The Nasdaq, S&P 500, and Japan’s Nikkei 225 all reached fresh record highs recently, reflecting broad investor confidence. That same optimism has eroded the yen’s safe-haven demand, reinforcing its role as the world’s go-to funding currency.
The dynamic mirrors the mid-2000s carry trade boom, when yen weakness fuelled speculative investment worldwide - until a sudden BoJ policy shift reversed the trend. For now, however, Japan’s dovish monetary stance and fiscal expansion are keeping the strategy alive.
Trading insight: Carry trades are profitable when volatility is low and interest-rate spreads are wide - but they can unwind violently when sentiment shifts. Learn more about trading in turbulent markets in our guide to market volatility.
Tokyo’s dilemma: intervene or tolerate the slide
Japan’s Ministry of Finance is caught in a familiar bind. With USD/JPY now above 151, traders are watching for signs of government intervention - historically triggered when the pair approaches 150–152.
Finance Minister Katsunobu Kato has reiterated Japan’s readiness to counter “excessive volatility,” but the market remains sceptical. Interventions are costly and short-lived unless backed by monetary policy alignment. With Takaichi’s administration leaning toward fiscal expansion, verbal warnings alone are unlikely to stop yen selling.
That leaves Tokyo with two options: intervene directly, risking limited success, or wait and hope the market stabilises - a risky call as speculative positioning tilts heavily toward USD/JPY longs.
The U.S. factor: a resilient dollar despite headwinds
The U.S. dollar remains firm even amid domestic challenges. Despite the ongoing government shutdown and expectations of Federal Reserve rate cuts - with markets pricing a 95% probability of a 25 bps cut in October and 84% in December - the dollar continues to benefit from safe-haven demand.
The DXY Index is holding above 98, reflecting the market’s view that U.S. assets remain more stable than Japan’s.
The result: even a softening dollar appears strong relative to the yen, keeping USD/JPY well supported.
Until the Fed accelerates easing or the BoJ tightens, the yield gap between the two economies will continue to anchor yen weakness.
What could change the trend?
Several triggers could reverse or slow the yen’s decline:
- BoJ policy pivot: A hawkish statement or surprise rate hike could shock markets and lift the yen.
- Coordinated intervention: Joint action by the Ministry of Finance and the BoJ could produce a sharper, more lasting rebound.
- Global risk-off event: A major equity correction or geopolitical flare-up could restore safe-haven demand.
- Faster U.S. rate cuts: A dovish Fed could narrow yield differentials and curb USD/JPY momentum.
Without one of these catalysts, however, the yen’s weakness looks set to continue.
USD JPY technical insights: USD/JPY eyes 155
At the time of writing, buy pressure is evident on the daily chart, with the pair in price discovery mode around 152.36. Volume data shows buyer dominance, and sellers have not yet shown enough conviction to challenge the trend.
If selling pressure builds, a yen comeback could trigger a pullback toward the 147.10 and 146.24 support levels. However, if bullish momentum persists, USD/JPY could extend its rally toward 155, marking a potential new high for 2025.
Technical takeaway: The trend remains bullish, but heightened volatility near intervention levels means traders should manage position size, margin usage, and leverage exposure carefully.
Traders can monitor these USD/JPY levels using Deriv MT5’s advanced charting tools for precise entry and exit timing.
Yen Investment implications
For traders, policy divergence remains the key theme driving USD/JPY.
- Short-term strategies: Buying on dips may remain favourable as long as 151 holds as support, but traders should monitor Tokyo’s rhetoric closely.
- Medium-term positioning: Maintaining flexibility may be favourable - intervention or policy surprises could trigger sharp reversals.
- Cross-market impact: The return of the carry trade extends beyond FX, potentially boosting global equity and bond flows funded by cheap yen borrowing.
Our forex trading calculator can help determine optimal position sizing, margin requirements, and potential returns for carry-trade strategies.
Unless Japan tightens policy soon, 2025 could mark the full return of the global carry trade - and a prolonged period of yen weakness.
The performance figures quoted are not a guarantee of future performance.
