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August 02, 2026
Partner, Chief Economist
For decades, the carry trade dominated USD/JPY, as investors borrowed cheaply in yen to buy higher-yielding dollar assets, and the currency moved in lockstep with the US-Japan interest rate differential, see the first chart below.
That link broke down after Liberation Day in April 2025, when trade wars unleashed the kind of volatility that makes carry trades dangerous, since the strategy earns a slow, steady yield that a single sharp move in the yen can wipe out, prompting investors to unwind their positions regardless of the still-wide yield gap, see the second chart below.
With the carry trade's pull now diminished, the currency has taken its cue not from the yield math but from Japan's deteriorating fiscal outlook.
Alongside this currency shift, a deeper transformation is underway in Japanese equities, where corporate governance reform has driven a record rise in shareholder activism and pulled foreign ownership to around a third of the market, see the third and fourth charts below.
The bottom line is that the yen carry trade has broken down, and the yen is no longer a rates story. Until volatility subsides, it will trade on Japan's fiscal outlook rather than the interest rate gap.
For more discussion, see our chart book available here.
Sources: Bloomberg, Macrobond, Apollo Chief Economist
Source: Apollo Chief Economist
Sources: Bloomberg, Apollo Chief Economist
Note: The number of Trust Banks are included in that of City & Regional Banks in and before 1985 Survey. Sources: Tokyo Stock Exchange Shareownership Survey, Apollo Chief Economist
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