The hidden risks of the yen carry trade: when will the time bomb explode?

The persistent weakness of the Japanese yen has made carry trade operations one of the most popular strategies among global traders. However, beneath this apparent market calm, mounting pressure could trigger a “gray rhinoceros” in 2026.

How carry trade became too dangerous

Carry trade operations work on a simple principle: borrow in a weak currency (the yen) to invest in higher-yield assets. When Japanese interest rates remain low and the yen depreciates continuously, this business becomes irresistible for many funds and speculative traders.

The problem is that as more participants join this strategy, the clustering of positions intensifies. Markets become saturated with excessive leverage, and any unexpected change in monetary conditions could trigger a massive deleveraging.

Why 2026 could be the breaking point

The Bank of Japan has been signaling its intention to normalize interest rates. If it finally raises rates more aggressively than expected, or if the yen begins to recover quickly, traders who have accumulated short positions in yen would face significant losses.

In that scenario, forced liquidation of positions would spread across the entire market, affecting not only currency traders but also cryptocurrency markets, stocks, and bonds. This “gray rhinoceros” — a predictable threat ignored by greed for profits — would finally be on its way.

The market reading you should make

The reality is that no economic phenomenon happens overnight. The signs are already there: unusual volatility in currency pairs, pressure in emerging markets, and defensive moves in safe-haven assets.

For traders, the key question is not if it will happen, but when. Preparing for a severe correction doesn’t mean abandoning the carry trade, but reducing leveraged exposure and diversifying risk sources. The market always offers opportunities to those who see the storm coming.