Global & Geopolitical Developments
Japan: The Yen and the Rise of Shareholder Activism
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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
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