the USD/JPY pair remains a market that could have implications across other markets, similar to what we saw last summer when the initial stages of the unwinding carry trade drove a global equity sell-off. In that episode USD/JPY lost a little more than 2,000 pips and this caused strong bearish moves in U.S. equities, particularly the high-flying large cap tech that had rallied for so long from the 2022 lows.
But at that point cooler heads prevailed and the Bank of Japan suddenly didn’t want to hike rates any longer, and as the USD recovered in Q4, so did USD/JPY. Soon, headlines were proclaiming the return of the carry trade but given the continued cutting stance from the FOMC, that argument didn’t make much sense.
So far in 2025 and as evidence has mounted that the USD may have topped, there’s growing fear that another episode of carry unwind may be before us. Last week saw USD/JPY re-test the 150.00 level, and even as Bank of Japan members sounded in no hurry to hike rates, helping to bring a bounce back above 150.00, an abysmal US PMI print brought bears back, leading to another push below 150.00 as a strong sell-off ensued in USD/JPY. And this time equities similarly sold off and this could be highlighting the shared relationship, of the carry trade driving leverage in high-flying names and the unwind of the carry trade coming with a de-leveraging event across global markets.
This isn’t a foregone conclusion, however, as we’ve seen Japanese policy makers help to move markets back from the ledge multiple times already. – js