The rapid appreciation of the Japanese yen is becoming an increasingly important variable for global markets as investors reassess the profitability of yen-funded carry trades. USD/JPY has fallen from a July peak near 163.98 to as low as 155.31 in early September, while Japanese authorities have already committed more than ¥27 trillion to foreign-exchange intervention this year, raising the possibility that another sharp yen move could transmit volatility into global equities, bonds and credit markets.

The Yen’s Reversal Changes the Carry-Trade Equation

The yen has traditionally been one of the world’s preferred funding currencies because Japanese interest rates remained exceptionally low for an extended period. In a typical yen carry trade, an investor borrows yen, converts the proceeds into another currency and invests in higher-yielding assets such as U.S. equities, bonds or credit instruments.

The strategy can generate attractive returns when the yen remains stable or depreciates. The risk changes when the yen strengthens rapidly. If an investor borrowed ¥100 million when USD/JPY was 160 and the exchange rate subsequently falls to 155, the yen liability becomes more expensive when converted back into dollars. For leveraged positions, even a relatively modest currency move can materially reduce equity capital.

The mechanism was demonstrated during the August 2024 market turmoil. A sharp yen appreciation following a Bank of Japan rate increase helped trigger the unwinding of yen-funded positions, contributing to significant losses in Japanese and global equities. UBS estimated at the time that the dollar-yen carry trade had reached at least $500 billion at its peak, with only about half of the position unwound during the initial episode.

Japan Has Already Used Record-Scale Intervention

Tokyo’s willingness to intervene adds another layer to the currency equation. Japan spent ¥11.73 trillion supporting the yen between April 28 and May 27, equivalent to roughly $73.5 billion at the time. Authorities subsequently spent another ¥15.39 trillion between July 30 and August 26, the largest monthly intervention operation on record. Cumulatively, intervention during 2026 has exceeded ¥27 trillion.

The intervention has not permanently reversed the forces behind yen weakness. Japan’s interest-rate differential with the United States remains substantial, while higher energy costs and Japan’s dependence on imported commodities can place additional pressure on the currency. Japanese officials have nevertheless continued to signal that they are prepared to respond to excessive or disorderly currency movements. Reuters reported on September 4 that Japan’s top currency diplomat reaffirmed the government’s readiness to intervene, while noting that the yen’s recent rebound had subsequently partially reversed.

This makes the current market environment different from a simple one-way currency trade. Traders must now consider both monetary-policy risk and intervention risk, increasing the potential cost of maintaining large short-yen positions.

Bank of Japan Tightening Could Amplify the Move

The second major catalyst is the prospect of further Bank of Japan tightening. Reuters reported that markets were assigning approximately a 97% probability to a 25-basis-point BOJ rate increase in September as of September 4, substantially higher than the 75% probability cited in the supplied source. The BOJ is scheduled to meet on September 17–18, while policymakers have recently indicated that inflation and changing global conditions could justify a more flexible approach to rate increases.

Higher Japanese rates would narrow the interest-rate advantage that has supported borrowing in yen and investing overseas. At the same time, Japanese government bond yields have risen significantly, potentially making domestic assets more attractive to Japanese institutions that have historically allocated substantial capital abroad. Reuters and other market analysis have identified possible repatriation flows as another factor that could reinforce yen appreciation.

The risk for global markets is therefore not simply that the yen becomes stronger. It is that a rapid yen appreciation forces leveraged investors to sell foreign assets to repay yen liabilities. Such transactions can create a feedback loop in which yen buying causes further yen appreciation, which then generates additional position unwinding.

Why Global Equities and Bonds Are Vulnerable

The potential transmission mechanism extends well beyond Japan. Yen-funded positions have historically been used to gain exposure to U.S. technology stocks, emerging-market assets, credit and other higher-return investments. A disorderly unwind could therefore create selling pressure in markets that have little direct connection to the Japanese economy.

For Israeli and global investors, the issue is particularly relevant because the current environment combines currency volatility, rising Japanese bond yields and changing expectations for U.S. monetary policy. The Federal Reserve’s policy outlook influences the interest-rate gap that supports carry trades, while BOJ tightening works in the opposite direction. Reuters reported that the yen gained roughly 2% during the week through September 4, its strongest weekly performance since the July U.S.-Japan intervention.

The immediate focus will be on USD/JPY, Japanese government-bond yields, speculative yen positioning, BOJ communication and any further intervention. A gradual yen recovery would give markets time to adjust, whereas another abrupt currency move could force leveraged positions to be reduced rapidly. The August 2024 experience demonstrates that the carry trade can become a global market issue when currency, leverage and monetary policy shift simultaneously.

Going forward, the central question is whether the yen’s recent recovery represents an orderly adjustment or the beginning of a broader carry-trade unwind. The September BOJ meeting, Japanese intervention signals and incoming U.S. inflation and employment data will be particularly important. If Japanese rates rise while U.S. yields fall, the narrowing rate differential could provide additional momentum to the yen; if the opposite occurs, USD/JPY could stabilize and relieve pressure on leveraged positions. Either way, the currency is becoming a more important transmission channel for global risk than its headline exchange-rate movement alone suggests.