In Japan, eyes on the Central Bank, why the carry trade is at an end

Once upon a time there was a yen so weak (or maybe there still is) that it made Japan the world's ATM. Investors borrowed yen at almost no cost, invested everywhere (carry trade) - from Wall Street to Frankfurt - and cashed in the difference. A game that lasted for years. Then, in the summer of 2024, something cracked: the Bank of Japan (BoJ) raised rates and in one session the Nikkei lost 12 per cent. A signal that today has probably become a direction: at the BoJ session on 18-19 March there might be a new rate hike from 0.75 per cent to 1 per cent. Which would not please Premier Sanae Takaichi who won the elections on 8 February 2026 with an overwhelming majority (two thirds of the Lower House) for the Liberal Democratic Party (Ldp). This is no ordinary victory: it is a mandate for massive investments in technology, semiconductors and defence, in a context made hotter by the war in Iran, which is also pushing Tokyo to reconsider the security of its energy routes.

BoJ Governor Kazuo Ueda confirmed that new rate hikes are on the table. For a country that has experienced decades of negative rates, this is a historic turning point. 'Governor Ueda,' explains Christian Zorico, head of fixed income strategies at Frame Asset Management, 'has already confirmed that the BoJ is ready to raise the benchmark rate further. A less expansive stance could initially create a more volatile phase for the markets. However, global investors are likely to appreciate greater austerity in the long term. If the BoJ's choices prove credible, the central bank could better control a yield curve that is currently steepening sharply.

The numbers confirm this: as of 3 March 2026, the 10-year Jgb yields 2.13 per cent, the 30-year 3.33 per cent, and the 40-year 3.55 per cent. 'The appreciation dynamic should be monitored,' adds Zorico, 'not only as a wake-up call, but also with a view to potential investment.

"An increase in rates could affect the carry trade," points out Alessandro Vitaloni, senior portfolio manager at Symphonia Sgr, "a dynamic already observed in the summer of 2024 when the Nikkei reacted with a 12% drop in a single session. Zorico points out: 'The rate differential is the element that is changing some investment dynamics. The yen's relative strength in recent sessions can be attributed more to a search for safe haven assets than to movements associated with rate dynamics'.

But there is an even deeper effect: the return of capital. For years, Japanese institutional investors parked their money abroad, where it was higher than in the Rising Sun. "The Japanese investor who has preferred investments in currencies other than the yen for years," recalls Zorico, "may decide to allocate a larger part of his portfolio in local currency. The particularly high yields offered by the long-term component of the government curve act as a magnet'. Vitaloni agrees: 'The return of capital to Japan is a highly conceivable scenario and is predicted by analysts for 2026'.