The yen has strengthened about 3% against the dollar this month, touching its strongest level since February, on expectations that the Bank of Japan will accelerate interest rate hikes, combined with pressure from US Treasury Secretary Scott Bessent, who supports a stronger yen. As a result, the market is once again focused on the risk of unwinding yen carry trades, amid concerns that if investors rush to close positions, it could trigger selling and weigh on the rally in global stock markets, especially technology stocks, growth stocks, and emerging market assets. This week the yen strengthened past the key level of 155 yen per dollar and touched 152.89 yen per dollar on Tuesday, before moving around 154 yen per dollar at present. Meanwhile, hedge funds are positioning for the yen to strengthen past 150 yen per dollar by year-end, and some long-dated options are targeting 140 yen per dollar. Andrea Gabellone, head of global equities at KBC Securities, said the yen is one of the most important warning signals the global stock market is watching right now, because speculative positions remain elevated, with the biggest risk in technology stocks. Dilin Wu, a strategist at Pepperstone, said global growth stocks with high beta and expensive valuations tend to be hit hardest. David Clewell, co-manager of the Multi-Asset Global Income strategy at T. Rowe Price, said 152 yen per dollar is a key level to watch, because it is close to the exchange-rate assumption Japanese companies use in their earnings forecasts. If the yen strengthens past that level, profit growth at Japanese companies over the next 12 months could stall or turn negative. This situation differs from 2024, because the market has already almost fully priced in the possibility of a 0.25% rate hike at the September 17-18 meeting, and this round of yen appreciation has been more orderly. The BOJ's policy rate stands at 1%, up from 0.25% in 2024, and the Fed has cut rates in the recent period, reducing the yield differential from borrowing in yen to invest in dollar-denominated assets. Data from the Bank for International Settlements, or BIS, shows that yen-denominated loans and deposits by non-bank borrowers outside their home countries, used as one gauge of carry trade activity, stood at about 42 trillion yen in the first quarter, down from a record high of 45.7 trillion yen in late 2024, but still nearly double the level of a decade ago. The market's direction from here therefore depends on signals from BOJ Governor Kazuo Ueda about the rate outlook. BOJ officials have signaled they may be open to raising rates more frequently than every six months, but still want to preserve flexibility in setting policy in the future. Wei Li, global chief investment strategist at BlackRock, said that as Japan emerges from a long period of deflation and interest rates return to normal, the appeal of the yen carry trade is no longer as clear as it once was.
BlackRock Inc
T. Rowe Price Group IncExpectations of BOJ rate hikes push Japanese bond yields higher.
