·
·
Tuesday, 18 August 2026dailybeirut.com
Economy
The yen reached 163 per dollar in late July, its highest level since 1986, prompting Japanese authorities to take emergency measures. In an unprecedented move, the U.S. Treasury joined intervention efforts, using part of its foreign exchange reserves to buy yen in coordination with the Bank of Japan.
The yen reached 163 per dollar in late July, its highest level since 1986, prompting Japanese authorities to take emergency measures. In an unprecedented move, the U.S. Treasury joined intervention efforts, using part of its foreign exchange reserves to buy yen in coordination with the Bank of Japan.
The carry trade strategy involves borrowing in a low-cost currency such as the yen, converting funds into other currencies, and investing in assets that yield higher returns. According to The Economist, over the years, this strategy has become one of the most important sources of liquidity in global markets, benefiting from the significant interest rate gap between Japan’s low rates and higher rates in the United States and other countries.
As long as the yen remained weak or stable, investors profited from the return differential between the two currencies. But a sudden rise in the yen increases the cost of repurchasing the Japanese currency needed to repay loans, prompting investors to sell the assets they bought and close their positions. If this occurs on a large scale, it could trigger a wave of synchronized selling across stock, bond, and high-risk asset markets.
The Bank of Japan played an exceptional role in providing cheap liquidity to global markets through years of ultra-easy monetary policy, maintaining extremely low interest rates while other central banks raised borrowing costs to combat inflation. As a result, the yen became one of the world’s most important funding currencies. However, Japan’s gradual shift toward higher interest rates is beginning to reshape the equation that supported the carry trade for decades.
The U.S. Treasury’s intervention carries special significance, as Washington rarely directly intervenes to support another country’s currency—especially when it involves reshaping global capital flows. This move comes at a time when a weak yen has become both an economic and political issue for Japan due to its impact on import prices, energy and food costs, and household purchasing power. Conversely, a rapid rise in the yen could harm Japanese exporters, forcing authorities into a delicate balancing act between preventing currency collapse and preserving competitiveness.
Through years of ultra-easy monetary policy, the Bank of Japan indirectly became one of the largest sources of funding for global markets. However, the shift toward a tighter policy may turn this advantage into a source of risk. As the cost of yen-denominated financing rises, investment deals based on borrowing the Japanese currency become less attractive. If this coincides with a rising yen, closing these positions becomes more urgent. The sensitivity of the situation lies in the massive amounts of capital tied to this strategy—many carry trade positions are difficult to measure precisely because they are spread across hedge funds, banks, institutional investors, and various financial instruments.
