Japan’s steep yield curve opens ‘reverse carry’ trade opportunity, Eastspring says
A banknote of Japanese yen is seen in this illustration picture taken June 15, 2022. REUTERS/Florence Lo/Illustration
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Sept 22 – A rise in Japanese bond yields is creating a “reverse carry” opportunity for overseas investors as Bank of Japan interest-rate hikes make the traditional yen-funded carry trade less compelling, Rong Ren Goh, fixed income portfolio manager at Eastspring Investments, said on Wednesday.
Japanese asset prices have swung sharply since the US Federal Reserve and BOJ raised rates within two days of each other last week, with a decades-long era of ultra-cheap yen funding potentially giving way to a new dynamic where Japan’s own bonds become the more attractive trade.
Buying ultra-long Japanese government bonds and hedging yen exposure back into dollars or another developed-market currency could potentially give investors higher yields versus comparable bonds in their home markets, Goh told the Reuters Global Markets Forum.
“The 30-year Japanese government bond above 4 per cent, when swapped in any developed-market currency in the world, including the dollar, gives you an FX-hedged yield 100 to 200 basis points higher than the base currency equivalent,” he said.
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Goh said the traditional yen-funded carry trade – in which investors borrow cheaply in the Japanese currency to buy higher-yielding foreign assets – is no longer a “no-brainer”, as markets expect Japan’s policy rate to eventually reach around 2 per cent from 1.25 per cent currently.
He expects the reverse carry trade to gain broader appeal as investors become more confident of a stabilisation in Japanese bond prices following a selloff that started in 2022.
Positioning data showed the net yen long position in the week to September 15 jumped to its highest since July 2025.
A sharp move lower for the yen after Friday’s 25-bp BOJ rate hike that came with two dissents, which investors interpreted as a dovish tilt at the Japanese central bank, was contained by a report that authorities conducted rate checks in the currency market.
The yen is currently up 1.2 per cent versus the dollar month-to-date.
Pointing to Japan’s steepening yield curve – where the gap between 2- and 30-year JGB yields is more than 200 bps compared with an average of around 80 bps in other core developed markets where curves are flattening – Goh said buying dollar bonds no longer offered “any compelling carry play”, even if the differential between U.S. and Japanese interest rates remained wide.
Goh said Eastspring – which manages $291 billion in assets – is adding shorter-dated dollar-denominated bonds, while favouring the ultra-long end of the Japanese curve where the firm is gradually building exposure through high-quality corporate and Samurai bonds as it seeks “additional credit spread over and above JGBs to enhance carry further”.
Samurai bonds are yen-denominated debt issued by foreign governments or companies.
Eastspring began 2026 with a relatively “underweight” position on the yen due to uncertainty over Japan’s fiscal and monetary policies, but moved to a more neutral stance around August as currency intervention risk became more meaningful, Goh said.
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Source: Reuters
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