Could the yen’s potential carry trades spark a USDJPY surge?

It’s not every day you hear traders whisper about the yen carry trade like it’s 2006 again. But here we are. While headlines have been fixated on Trump’s “historic” trade deal with Japan, complete with eye-popping numbers and tariff drama, the FX market seems less impressed. USDJPY has slipped under 147, the Dollar’s momentum is wobbling, and the real story might be one that’s quietly resurfacing: the return of the carry trade.

With Japan still glued to low interest rates and the Fed not quite ready to pivot, the conditions that once made borrowing yen to chase yield so appealing might just be creeping back into play.

The Japan-US trade deal that was meant to move markets

According to President Trump, the U.S. has struck “perhaps the largest deal ever” with Japan. Big claim. The agreement includes a supposed $550 billion investment from Japan into the U.S. - a figure that raised more eyebrows than bond yields - and a 15% reciprocal tariff on Japanese goods entering the States. In return, Japan agreed to open up its famously guarded markets to U.S. cars, trucks, and even rice.

Japan’s top trade negotiator, Ryosei Akazawa, posted a triumphant “Mission Complete” on X. But markets barely blinked. USDJPY actually dipped, and the dollar index softened. 

For all the political theatre, traders seemed more focused on rate expectations and risk dynamics than on headlines from Washington.

What is the carry trade, and why does it matter now?

Ever heard of the carry trade? It's making a comeback, and here’s why it matters now. At its core, it’s about borrowing cheaply and investing in higher-yielding assets elsewhere. For years, Japan’s near-zero interest rate environment made it the go-to funding currency.

It fell out of fashion post-2008, reappeared briefly during the QE years, and then vanished again as volatility returned and global yields converged. 

Below are the carry trade cumulative returns before the financial crisis.

And below we can see the carry trade cumulative returns after the financial crisis.

But now, something’s shifting. The Fed may still have rate cuts in its forecast, but sticky inflation and tariff-driven price pressures are keeping it cautious. Meanwhile, Japan, with slowing growth, weak wage data, and a fragile political backdrop, has little room to tighten. That creates the kind of rate divergence that carry traders love.

USDJPY isn’t exactly running away with it

Despite all this, USDJPY isn’t soaring. Quite the opposite. The pair recently dipped below the 147.00 level, with momentum indicators flashing signs of fatigue. It had climbed earlier in the year, riding on interest rate differentials and a wave of risk-on sentiment. But now? Traders are pausing.

Part of the reason is that the BoJ remains on the sidelines, despite global tightening. Analysts suggest Japan’s soft inflation data and political flux are keeping policy makers cautious. Add to that the uncertainty over whether Japan can genuinely funnel $550 billion into the U.S. economy, and you’ve got a market that’s interested, but not convinced.

Politics meets policy in Tokyo

Let’s not forget the domestic backdrop in Japan. Prime Minister Shigeru Ishiba’s party just lost its upper-house majority by three seats. He’s hanging on with the support of smaller coalition partners, but his grip is weaker, and that matters.

A slimmer majority means less room to manoeuvre on economic reforms, especially if U.S. demands intensify. Still, markets largely welcomed the result, not because they love Ishiba, but because it prevents a potentially market-shaking swing to a high-tax opposition. For now, the BoJ has even fewer reasons to rock the boat.

A whisper, not a roar - yet

So is the yen carry trade back? Not in full force. But the conditions that nurtured it - low volatility, rate divergence, and a muted BoJ - are re-emerging. The USDJPY pair may not be breaking out, but it’s no longer trading on headlines alone.

Safe-haven demand for the yen is fading, especially with the trade deal neutralising the 1 August tariff deadline. While the investment figure from Japan might be more fluff than fact, analysts say the structural story - of divergent central banks and old strategies creeping back - holds weight. 

Carry trades don’t shout. They sneak back in when no one’s looking. Traders may still be debating Trump’s tariff tactics or the credibility of Japan’s investment pledge, but in the background, the yen could be quietly finding its old role again - not as a haven, but as a funding tool.

And if that momentum builds? USDJPY might just start listening. 

‍

USDJPY technical outlook

At the time of writing, the pair has recovered some ground from earlier drawdowns, hovering around a support level, hinting at a potential move up.

However, the volume bars show strong sell pressure over the past two days with little pushback from buyers, hinting at a potential further drawdown if buyers don’t push with conviction. A move down could find support at the $146.74 and $142.67 support levels. Conversely, a move up could find resistance at the $149.19 and $151.16 price levels.

‍

‍