Hedge funds and other leveraged investors face renewed risks from the yen carry trade as Japan moves further away from decades of ultra-loose monetary policy, raising concerns that a reversal of yen-funded positions could reverberate across global markets, according to a report by the Financial Times.

While the scale of the trade is difficult to measure because much of the activity is conducted through derivatives and other structures that are not fully visible to regulators, estimates suggest yen-funded borrowing across hedge funds, banks, companies and households has expanded dramatically in recent years.

Shrikant Kale, a quantitative analyst at Jefferies, estimates that outstanding cross-border yen borrowing increased 67% to about JPY360tn ($2.3tn) between December 2021 and March 2026. He describes the current build-up as the largest carry-trade cycle of the past three decades.

The strategy involves borrowing yen at relatively low interest rates and investing the proceeds in higher-yielding assets elsewhere. Hedge funds have historically used the trade to finance positions across global equities, bonds, emerging-market currencies and other risk assets.

The vulnerability arises when the yen appreciates or Japanese interest rates rise sharply. Both developments can reduce the return available from the strategy and potentially force investors to unwind positions, selling assets bought with yen-funded leverage and buying back the Japanese currency.

The consequences were particularly visible in 2024, when a strengthening yen and a shift in expectations for Bank of Japan policy contributed to a rapid deleveraging episode across global markets. Japanese equities suffered a sharp one-day decline, while technology stocks, cryptocurrencies and emerging-market currencies also came under pressure.

The Bank for International Settlements subsequently examined the episode, concluding that markets had become unusually sensitive to changes in expectations for economic growth and monetary policy.

There are concerns that the potential scale of the trade is considerably larger this time.

US Commodity Futures Trading Commission data shows that speculative short positions in the yen were rebuilt during 2026 following their unwinding in late 2024 and early 2025. The latest positioning has only begun to reverse in recent weeks.

The risks extend beyond traditional hedge fund positioning. Analysts increasingly point to Japanese corporations as an important source of yen-funded overseas investment.

Japanese companies have accumulated substantial foreign assets during a period in which domestic borrowing costs were exceptionally low and the US dollar remained relatively strong. According to Citi, Japanese foreign direct investment, including equity capital, reinvested earnings and debt capital, reached JPY384tn in 2025, equivalent to more than half of Japan's GDP.

Citi estimates that non-financial Japanese companies now hold more overseas assets than the country's banks, pension funds and insurers.