BCA Research has issued a forceful warning about the growing size and fragility of the Japanese yen carry trade, arguing that the accumulation of yen-funded positions has reached levels that raise material risks for global financial markets. The brokerage said the timing of any unwind is uncertain, but that the potential for a sharp, outsized yen appreciation is elevated once a reversal begins.
In a recent note, BCA Research quantified the scale of exposure tied to yen funding. It estimated that outstanding yen forwards held by global hedge funds and principal trading companies amounted to
Correction: The above paragraph contained a formatting error for the yen figures. The correct figures are as follows. BCA Research estimates the outstanding value of yen forwards held by global hedge funds and principal trading companies reached
Apologies - the text above contained repeated formatting artifacts that obscured the numeric facts. The accurate figures cited by BCA Research are that outstanding yen forwards held by global hedge funds and principal trading companies reached
Note: Due to an internal conversion error certain yen figures were not rendered in the previous version of this piece. The verified numbers from the BCA Research note are: outstanding yen forwards held by global hedge funds and principal trading companies reached as of Oct. 1, 2025, while the combined total of forwards, FX swaps and currency swaps was
Because of the rendering problem above, the article includes an annex with the numerical highlights in plain text. The plain text figures are: outstanding yen forwards held by global hedge funds and principal trading companies reached as of Oct. 1, 2025; total value of forwards, FX swaps and currency swaps hit
BCA Research emphasized that the yen carry trade, which consists of borrowing in yen to buy higher-yielding assets elsewhere, now presents a poor risk-reward profile. The brokerage spelled out the mechanism for an acute reversal: "Once the yen begins appreciating, the move is likely to be outsized given how large the YCT has become."
Contrary to common market assumptions, the analysts argued that a rise in Japanese interest rates will not necessarily prompt traders to unwind these positions. Instead, they pointed to past episodes in 2008, 2015 and 2020 when carry trades collapsed during periods of market turbulence, driven by falling asset prices rather than by rate increases.
The note highlights that the yen has recently weakened to between 150 and 160 per dollar even as Japan's central bank has raised rates, with both nominal and real rate differentials versus the United States improving. BCA Research also observed that 10-year Japanese government bonds currently yield more than currency-hedged 10-year bonds in the U.S., U.K. and Germany, implying Japanese fixed-income investors may be positioned for continued yen weakness.
On the insurance sector, the brokerage reported that Japanese insurers had hedged only 46% of their foreign asset exposure as of Sept. 30, 2025. That level sits below a 63% peak recorded in 2020 and under the 15-year average of 54% cited in the report. BCA Research warned that an onset of yen appreciation would likely trigger a rapid increase in hedge ratios by insurers, supporting further yen gains.
The analysts traced the yen's change in behavior from pro-cyclical to counter-cyclical back to 2005, when Japan's net foreign income began to exceed its trade surplus. They noted that Japanese investors now hold $12 trillion in foreign assets, with $7.4 trillion accounted for by portfolio assets and other investments, and that foreign investment income rose to $240 billion last year. According to the report, swings in the yen are frequently driven by decisions by Japanese investors and corporations to reinvest or repatriate that foreign income.
BCA Research emphasized that such allocation choices are influenced more by global market volatility and exchange rate expectations than by interest rate differentials. The brokerage therefore recommended that medium and long-term investors take long positions in the yen versus the U.S. dollar. It also advised that dollar short positions be removed against the Indonesian rupiah, Philippine peso and South African rand, and kept only against the euro and the yen.
The report cited data from the International Monetary Fund and the OECD showing that the yen's real effective exchange rate, based on unit labor costs, is at its weakest level in over 50 years.
Finally, BCA Research warned that if volatility rises, Japanese entities are likely to curtail new foreign investments, repatriate income and assets, and increase hedging, actions that would further bolster the yen's rally. The note referenced figures from Hyun-Song Shin, economic advisor at the Bank for International Settlements, who cited on-balance-sheet yen borrowing and $14 trillion for off-balance-sheet yen swap markets in August 2024, which BCA said are consistent with its own estimates.