The yen's three-decade job as the world's cheapest funding currency is starting to crack — at least in Rabobank's reading. Senior FX strategist Jane Foley wrote on Wednesday that the Bank of Japan's steady drip of rate increases is quietly eroding the yen's appeal as the carry trade's funding leg, the mechanism by which traders borrow in yen and park the proceeds in higher-yielding assets abroad.
USD/JPY was changing hands at 158.34 on Wednesday, up 0.24% on the day, after climbing from 156.20 just before the BoJ's September hike to 156.70 in the hours after it, then 157.33 by September 22. The pair now sits almost exactly on the 200-day moving average near 158 that Foley flagged in an earlier note as potential resistance capping further dollar gains.
Foley's note reviews two very different yen rallies, and the contrast is the point. July's sharp USD/JPY decline came with the Ministry of Finance and the US Treasury buying yen together in a coordinated intervention; September's slide happened with no official hand in the market at all. That second episode matters more in her reading, because a yen move without intervention hints at something structural: traders may finally be repricing Japan itself — rising JGB yields, resilient growth, real wages turning positive — rather than just front-running the MoF's balance sheet. The backdrop is a hiking cycle that looked unthinkable two years ago. The BoJ lifted its policy rate a quarter point to 1.25% on September 18, a three-decade peak and its second increase in three months, just two days after the Federal Reserve's own quarter-point hike to 3.75–4.00%. Yet the yen fell on its own central bank's tightening, a market verdict that the BoJ is still moving too slowly to matter for the currency. Two dovish dissents on the September decision, from board members Asada and Sato, reinforced that impression.
The market's verdict is visible in the rate gap. At 1.25% against a 4.00% Fed upper bound, Japan still offers the cheapest funding in the G10 by roughly 275 basis points. That is the carry trade's oxygen supply.
Why it matters
Carry trades are the plumbing of global FX, and the yen has been their main pipe for the better part of two decades — a legacy of near-zero Japanese rates that persisted while every other major central bank hiked. When that pipe narrows, the effects travel far: the August 2024 mini-crash in equities and crypto was widely read as a glimpse of what a disorderly yen-carry unwind looks like. Foley's argument is that the unwind risk is slowly building in reverse — not from panic, but from the BoJ's grinding normalization making yen borrowing incrementally less attractive, deal by deal. This is playing out while the rest of the world is hiking too: the RBI raised rates this week for the first time in four years, and the dollar has now risen four weeks straight against the euro. A hawkish Fed — Goldman Sachs and Morgan Stanley both expect another increase in October — keeps the dollar leg of the trade funded and heavy.
What to watch
- October 29–30 BoJ meeting with a fresh Outlook Report. Markets were pricing roughly 30% odds of a hike to 1.50% in late September; a hawkish signal is what Foley says the yen needs for durable support.
- October 27–28 FOMC. The Fed sits at 3.75–4.00% after its September 16 hike, its first since 2023, and officials have been sounding hawkish.
- The 160 line. Finance Minister Satsuki Katayama has coordinated with US Treasury Secretary Scott Bessent, who had publicly urged Tokyo to raise rates faster and described the joint yen-buying operations as in America's own interest. Nikkei reported Japan had asked dealers for dollar/yen quotes in late September — a classic warning sign that officials may be about to act.
- JGB yields. The 10-year JGB near 3% is pricing further BoJ hikes into 2027; if yields keep climbing, domestic insurers' incentive to hold foreign bonds — including Treasuries — shrinks further.
MarketRadar take
The facts point one way for now: yen-negative. Two BoJ hikes have failed to lift the currency because both arrived wrapped in dovish packaging — split votes, no forward guidance — while the Fed hiked in the same week and kept talking tougher. With roughly 275 basis points of carry still on the table and the pair pinned just under the 160 intervention line, the path of least resistance remains higher USD/JPY into the October 30 BoJ decision. The risk that flips this is binary, not gradual: a genuinely hawkish BoJ surprise — 1.50% with a hawkish Outlook Report — or MoF action above 158.50, either of which could trigger the fast, disorderly yen squeeze that carry crowded positioning always invites. Watch the October 30 meeting, not the daily drift.
| Leg | Rate | Set |
|---|---|---|
| Fed funds, upper bound | 4.00% | Sep 16, 2026 |
| BoJ policy rate | 1.25% | Sep 18, 2026 |
| Policy gap | 275bp | computed |
