The Yen Carry Trade Is Losing Its Grip

Before April 2025, USD/JPY closely tracked the 10-year yield differential between US and Japanese government bonds, reflecting the popularity of borrowing in low-yielding yen to fund higher-yielding dollar assets.
That relationship weakened after “Liberation Day,” when trade-war uncertainty triggered a volatility spike and forced investors to unwind carry positions. Since then, the US-Japan 10-year yield gap has narrowed by roughly 1 percentage point to around 2 percentage points , near its lowest level since 2021.
Despite the shrinking rate advantage, USD/JPY continued moving higher, suggesting the yen is no longer being driven primarily by interest-rate differentials. Investors may instead be placing greater weight on Japan’s heavy debt burden and rising debt-servicing costs.