Japanese 10,000 yen, 5,000 yen and 1,000 yen banknotes sorted in Tokyo, Japan on Wednesday, October 8, 2025.
Toru Hanai | Bloomberg | Getty Images
The recent appreciation of the Japanese yen has led investors to look elsewhere for their carry trade funds, with Chinese and Canadian currencies being looked at as alternative currencies.
The yen, the best-performing G10 currency, has appreciated about 6% against the dollar since late July, when authorities intervened in currency markets, according to LSEG data.
According to the Commodity Futures Trading Commission, speculators were net buyers of the yen in the week ending September 8. These positions totaled approximately 10,800 contracts, and the previous week’s short position was approximately 92,200 yen.
The hawkish comments of the Bank of Japan’s board members, who left open the possibility of accelerating interest rate hikes, promoted the yen’s appreciation in a way that the historic joint exchange rate intervention between Japan and the United States could not. Moreover, Treasury Secretary Scott Bessent last week continued to warn speculators about betting against the yen, saying, “I’m in charge now.”
All of this makes the yen less attractive for carry trades, where investors borrow from lower-yielding assets and invest in higher-yielding ones.
The recent appreciation of the Japanese yen has investors looking elsewhere for carry trade funds.
According to Bank of America, the Chinese yuan has emerged as a possible candidate.
Claudio Pilon, head of Asian foreign exchange and rates, said of deflation: “Japan is like China 20 years ago, and I like to say that China is becoming like Japan.”
“The openness of capital accounts in China is much more restricted than in Japan,” he said on Friday’s Squawk Box Asia show. “However, there has been a large amount of CNH (offshore renminbi) bond issuance, and many foreign multinationals are seeking financing and issuance in these markets.”
Last month, China kept its benchmark lending rates unchanged for 15 consecutive months, setting the one-year prime rate at 3% and the five-year prime rate at 3.5%. Although China’s offshore currency trades more freely than its onshore currency, it remains heavily dependent on the onshore currency controlled by the People’s Bank of China.
The Canadian dollar is also attracting investor attention. Foreign exchange strategists said in a report last week that they expect TD Securities to become a more attractive carry trade funding currency compared to the yen, noting that its carry-volatility ratio is “already comparable to the Japanese yen.”
The Canadian dollar has fallen following the latest round of retaliatory tariffs with the United States, but there is still room for weakness as tariff shocks impact sentiment, production and ultimately domestic economic indicators, they said.
The Bank of Canada kept interest rates unchanged at 2.25% at a meeting earlier this month.
Still, the recent appreciation of the Japanese currency does not seem to spell the end of the yen carry trade.
“We could see some degree of rotation,” said Chris Wong, foreign exchange strategist at OCBC. However, “even after the Bank of Japan raises rates again, Japan’s interest rates will likely remain low by global standards.”
The Bank of Japan is scheduled to hold a two-day policy meeting starting Wednesday, and is expected to raise the policy interest rate by 25 basis points to 1.25%.
By comparison, the target range for federal funds is 3.50% to 3.75%, the Bank of England’s rate is 3.75% and the European Central Bank’s rate is 2.5%.
