The Japanese yen has staged one of its sharpest rallies in years, gaining roughly 7 yen against the dollar in a single week to trade at 152.89 per dollar on September 5, its strongest level since February. The move has upended the once-mighty yen carry trade and forced speculators to cover massive short positions at a pace that has left traders scrambling to reassess whether years of betting against the Japanese currency have finally run out of road.
The scale of the unwind
Cross-border yen borrowing, a proxy for the carry trade's size, reached a record 360 trillion yen ($2.35 trillion) as of March, according to a Jefferies analysis of Bank for International Settlements data reported by Reuters. That figure represents the largest build-up of the trade in roughly three decades. The strategy, which involves borrowing yen at near-zero rates to invest in higher-yielding assets abroad, worked smoothly for years as the Bank of Japan kept policy rates pinned well below other major central banks. The abrupt reversal of those expectations has been brutal for anyone still positioned on the wrong side.
Commodity Futures Trading Commission data released on September 5 showed that non-commercial yen short positions widened by 28,900 contracts to a net short of 92,200 in the week ending September 1. The accumulation occurred even as the yen was beginning its rally, suggesting that many speculators were still adding to shorts just before the trade reversed. The report was the largest deterioration in the CFTC's yen data and left the yen with the biggest net short position among major currencies, according to the CFTC's Traders in Financial Futures report. The break below 155 on USD/JPY accelerated stop-loss-driven short-covering, amplifying the move.
A 97 percent bet on the BOJ
Market pricing now places the probability of a 25-basis-point Bank of Japan rate hike at the September 17-18 policy meeting at 97 percent, according to Tokyo Tanshi money market data cited by the Economic Times. That figure has climbed sharply from 52 percent just one month ago. The repricing has been driven by a convergence of domestic and international pressures.
Takuji Aida, an economic adviser to Prime Minister Sanae Takaichi and a member of the government's key economic panel, projected on September 7 that the BOJ will raise rates in September and continue hiking at a pace of once every quarter until January 2027, after which the bank would revert to roughly one hike every six months. Aida, a reflationist who had previously opposed rate increases, said he was moving his forecast forward from January 2027 because September provided a narrow window of opportunity before an extraordinary session of parliament convenes in early October to debate suspending an 8 percent food levy.
The political context matters. The yen's fall to 40-year lows above 163 per dollar in July triggered joint US-Japan intervention and pushed Takaichi's approval ratings to record lows as imported inflation squeezed households. US Treasury Secretary Scott Bessent has continued calling for "decisive" monetary steps to combat yen weakness, and BOJ Governor Kazuo Ueda signalled last week that the bank will debate raising rates in September with a focus on whether inflationary risks are heightening.
A global bond selloff adds fuel
The yen's rally has coincided with a broader sovereign bond selloff that underscores how far the repricing has spread. Japan's 10-year JGB yield crossed 3.00 percent on September 2 for the first time since September 1996, according to real-time data from Investing.com. The 30-year JGB yield rose to 4.19 percent, up roughly 29.6 percent year-over-year. The 10-year yield's breach of the 3 percent level puts a bookend on nearly three decades of ultra-low yields that began after Japan's post-bubble deflation took hold, when the BOJ's policy rate stood at 0.50 percent.
The move was not isolated to Japan. UK 30-year gilt yields reached 5.83 percent, near the year's peak. US 30-year Treasuries closed at 5.27 percent, their firmest level since 2007, according to Investing.com. The simultaneous repricing across major sovereign markets has tightened financial conditions the Federal Reserve did not deliver, re-pricing anything that discounts far-dated cash flows: long-duration equities, unprofitable growth names, commercial real estate, and public infrastructure financing.
For Japanese investors, the hedge ratio on foreign bonds has collapsed. The proportion of foreign bond holdings covered by currency hedges has fallen to approximately 40 percent, down from 62 percent in 2024, leaving a larger share of overseas assets exposed to yen appreciation. A firmer yen from sustained tightening would raise the value of unhedged yen assets in dollar terms, but it also squeezes exporters and lifts debt-service burdens on a government that still runs one of the world's highest debt-to-GDP ratios.
What the market is watching
The BOJ's September decision is now a near-certainty, but the path beyond it remains contested. Aida's projection of quarterly hikes through January followed by a slowdown suggests that even within the government, the appetite for a durable tightening cycle is limited. Every rate increase beyond September is, as the Financial Times noted, a tax on the same voters whose cost-of-living concerns drove the political need for a stronger yen in the first place.
For traders still holding yen shorts, the math is increasingly unfavourable. The carry trade's yield advantage was built on a differential that is now narrowing at an accelerating pace, while the cost of maintaining short positions has risen with the yen's rally. The question is no longer whether the BOJ will raise rates, but whether the global carry trade that Japan's ultraloose policy enabled can unwind without triggering the kind of volatility that marked August 2024's market turmoil.
Sources
- [The Economic Times](https://economictimes.indiatimes.com/markets/us-stocks/wall-street-guide/global-market-yen-rally-threatens-to-unravel-lucrative-carry-trade-ahead-of-boj-rate-decision/articleshow/133913871.cms) (September 8, 2026)
- [ECM Source](https://ecmsource.com/global-bond-selloff-japan-10-year-3-percent-uk-gilts-september-2026/) (September 1, 2026)
- [CFTC via Gate News](https://www.gate.com/news/detail/cftc-japanese-yen-short-positions-hit-92227-contracts-in-week-ending-sept-1-24019639) (September 5, 2026)
- [The Straits Times](https://www.straitstimes.com/business/japan-pm-takaichis-reflationist-aide-projects-bank-of-japan-rate-hike-in-september) (September 8, 2026)
