One of the most powerful — and least understood — trades in global finance is quietly coming back to life. It is called the yen carry trade, and the last time it unwound, in August 2024, it briefly convulsed markets around the world.

What the carry trade is

The idea is simple, even if the plumbing is not. Because the Bank of Japan kept interest rates near zero for decades, the yen became the world's cheapest currency to borrow. Investors borrow in yen, convert the money into a higher-yielding currency like the dollar, and buy assets that pay more — U.S. Treasuries, stocks, emerging-market bonds. The profit is the interest-rate gap, often amplified with borrowed money, as the World Economic Forum explains. Borrow at near-zero in Tokyo, earn 4%-plus in the U.S., and pocket the difference.

The hidden risk is the currency. The trade is, in effect, a bet that the yen stays weak. If the yen suddenly strengthens, the foreign-exchange loss can wipe out years of interest gains in days — and everyone rushes to unwind at once. (A carry trade profits from a rate gap between two currencies; its danger is that a move in the exchange rate can reverse the gains abruptly.)

August 2024: how fast it can break

That is exactly what happened last summer. On July 31, 2024, the Bank of Japan surprised markets by raising its policy rate to 0.25%. Two days later, a weak U.S. jobs report stoked fears of Federal Reserve rate cuts — narrowing the very gap the trade depended on. The yen jumped, and traders scrambled to buy back the currency they had borrowed.

The result was a cascade. On August 5, 2024, Japan's Nikkei 225 index fell 12.4% — its worst single-day drop since 1987 — and the shock rippled worldwide, hitting U.S. stocks and sending volatility gauges spiking, as the Bank for International Settlements later documented. Estimates at the time suggested a large share of carry positions were unwound within days. Markets stabilized quickly, but the episode became a case study in how a patient interest-rate bet can turn into a fast, global fire sale.

Why it's back in focus

Nearly a year later, the ingredients have partly reassembled. The yen has weakened to around 161 per dollar, near its softest in years, reflecting a strong dollar and a still-wide rate gap. That very weakness is what makes the trade attractive again: cheap yen to borrow, and a fat spread to earn.

Crucially, the gap has narrowed but not closed. The Bank of Japan raised its rate to 1.0% on June 16 — its highest since 1995 — and has signaled it will keep tightening gradually toward a neutral level, Al Jazeera reported. The U.S. Federal Reserve's rate remains far higher, so the incentive to borrow yen and buy dollars persists — but a tightening BOJ is precisely the kind of catalyst that lit the fuse in 2024.

Analysts flag a few worries. The size of the trade is genuinely unknown — estimates range widely, from a few trillion dollars to well over ten, because much of it hides in hard-to-measure currency derivatives. The trigger is unpredictable: a sudden yen rally, a hawkish BOJ surprise, or a broad risk-off shock could all force an unwind. And crowding cuts both ways — the more investors pile in while the yen is weak, the larger the potential stampede when it turns.

Why it matters

For investors, the carry trade is a reminder that calm, profitable strategies can mask hidden fragility: the 2024 unwind showed how quickly leverage and a currency move can spread stress far beyond Japan. For policymakers, it complicates the Bank of Japan's job — normalizing rates after decades near zero risks jolting a trade built on those very low rates, which is why the BOJ is moving so cautiously. And for markets broadly, it is one of the clearer channels through which a shift in one country's monetary policy can become everyone's problem. Boursel makes no prediction and gives no investment advice; the point is that the conditions that produced last year's scare are partly back — and a bet that thrives on a weak yen is only ever as stable as the yen itself.