The BoJ Trigger Has Fired. The Carry Unwind Has Not

The Trigger Has Already Fired This scenario was written around a single threshold: the Bank of [Japan](/metrics/ewj) raising its [policy rate](/glossary/fed-funds-rate) above 0.5% or materially accelerating its exit from [yield](/glossary/dividend-yield)-curve control. That threshold is behind us. On 16 June the BoJ lifted its rate to 1.00%, the highest since 1995, in a seven-to-one vote, and cited an [oil](/metrics/wti)-driven cost pass-through moving quickly through [wholesale prices](/glossary/producer-price-index). The condition the scenario was waiting [for](/metrics/fodsp) is met. What has not happened is the consequence.

Why the Yen Is Still Weak USD/JPY sat near 162 at the end of June, close to the weak end of its multi-decade range, even after the hike. The reason is arithmetic: the [Federal Reserve](/glossary/fomc) is on hold at 3.50-3.75% while [Japan](/metrics/ewj) is at 1.00%, a gap of roughly 2.6 points that still pays carry traders to borrow yen and buy higher-yielding assets. Normalisation has begun, but it has not yet closed the differential enough to reverse the flows. The [carry trade](/glossary/carry-trade) is not dead. It is stretched.

The Non-Linear Risk The danger in a [carry unwind](/glossary/fx-carry-unwind) is that it does not arrive gradually. It resolves violently once positioning breaks, as it did in August 2024, when a surprise BoJ hike sent USD/JPY from 162 to 142 in weeks and the Nikkei fell 12% in three sessions. The set-up today rhymes: crowded short-[yen positioning](/metrics/cftc-jpy-net-spec), a central bank that has signalled it is not finished, and a US rate that the market expects to fall. If the differential narrows from both sides at once, a [Fed](/glossary/fomc) cut and a BoJ hike, the same mechanical unwind can fire without warning.