How strengthened yen could impact your portfolio

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• The yen's rise now looks structural rather than a repeat of the short-lived bounces seen earlier this year, driven by a more hawkish Bank of Japan and capital returning to the country.
• Major investors such as Norway's Norges Bank Investment Management (NBIM), and potentially Japan's own pension fund, though that move is still just rumoured, are shifting money back into Japanese assets, adding further support to the currency.
• Today's yen carry trade is the largest in thirty years, so a sharp reversal could trigger forced selling and volatility across global markets, much like in 2024.
• Our highest-conviction currency call is the yen; we favour selective, higher-quality Asian credit while staying cautious on more leveraged, lower-quality assets.

Most investors do not track Japan's currency day-to-day. But right now, something is happening there that has the attention of some of the world's largest investors, and if it continues, the effects will be felt far beyond Japan. Here is what is going on, why it is different from what we have seen before, and what it could mean for your portfolio.

Why Japan's currency matters to global markets

For decades, borrowing money in Japan was almost free. The Bank of Japan kept interest rates extremely low, and at times negative, for years, making the yen the most popular currency in the world to borrow from. Investors would take out cheap loans in yen, convert the money into dollars or other currencies, and invest in higher-yielding assets abroad. This strategy, known as the carry trade, became one of the most widely used in global finance, with a constant stream of investors selling yen to fund positions elsewhere. The result: the yen weakened steadily, eventually falling to its lowest level since the 1980s.

Three interventions, and three fakeouts

As the yen kept falling, Japan's government stepped in multiple times this year to try to support it, pushing the yen up ~4% in January, ~2.3% in April, and ~4% again in late July¹. Each time, the gains faded quickly. Investors simply waited for the bounce and sold yen again, because nothing fundamental had changed. Stepping in to prop up a currency can slow its decline, but it cannot change the underlying reasons people are selling it.

The late July intervention was different in one important way: the United States joined in, selling euros to buy yen alongside Japan. The reason is straightforward; Japan is one of the largest holders of US government bonds. Treasury Secretary Scott Bessent has since reportedly challenged traders to counter his efforts to strengthen Japan's currency, making clear this is not just a market story but a policy one too.

The yen has strengthened around 4% again in recent weeks² but with no intervention to point to. This time, the market itself is moving, driven by a genuine shift in how investors see Japan.

The Bank of Japan is set to raise rates further. Markets are now pricing in a 97% chance the Bank of Japan will raise its key rate to 1.25%, up from just 52% a month ago. As Japan's rates rise, the carry trade becomes less profitable, and holding the yen instead becomes more attractive.

Japan's largest pension fund may be bringing money home. The Japanese pension investment fund, is the largest pension fund in the world, managing approximately ¥277 trillion (around $1.87 trillion) in assets. For years, it has been sending money abroad in search of better returns. Growing market rumours of a reallocation back toward Japanese assets could translate into enormous flows returning home.

Global institutions are rotating into Japanese bonds. For most of the last two decades, Japan's bond market offered almost no income, so global investors had little reason to hold it. That has changed. Norges Bank Investment Management, NBIM, which manages Norway's $2.3 trillion Government Pension Fund Global, has proposed cutting its US Treasury holdings by nearly $80 billion and increasing its allocation to Japanese government bonds from 4.6% to 7.4%, making Japan the single biggest beneficiary of the shift³. When the world's largest sovereign wealth fund moves toward Japan, we believe others tend to follow.

Retail investors at home may soon follow. Japan's Ministry of Finance and Financial Services Agency are reportedly working on tax incentives to attract everyday Japanese savers into the government bond market. If enacted, this could channel an estimated ¥3.8 trillion annually into the market. With retail Japanese government bonds offering very minimal risk of losing your original investment if held to maturity, they are a straightforward and accessible option for the many Japanese households currently sitting in low-return cash and bank deposits.

All of these forces; a more hawkish central bank, capital repatriation, and growing global and domestic demand for Japanese bonds; are pointing in the same direction. The momentum is building, and it is being driven by real shifts in policy and investment flows rather than by short-lived intervention.

The best way to understand the risk is to look at what happened the last time the yen moved sharply. In July 2024, a surprise Bank of Japan rate hike sent the yen surging roughly 13% against the US dollar. Investors who had borrowed cheaply in yen to fund global positions had to sell assets quickly to cover their exposure. The knock-on effects were significant: the S&P 500 fell around 7% from its peak, the Nasdaq dropped approximately 12%, and a widely tracked index of higher-risk corporate bonds widened by around 70 basis points. On August 5, 2024 alone, Japan's Nikkei 225 fell 12.4%, its worst single day since 1987⁴.

This is how carry trade unwinds work; when forced selling hits all at once, markets move fast and together, and losses in one corner of the market can quickly spread to others. Cross-border yen borrowing has since grown to a record $2.35 trillion as of March 2026⁵, making this the largest carry trade build-up in thirty years. In our view, the potential impact of a disorderly unwind today is larger than it was in 2024.

We believe the yen's current strength is structural, not temporary. A more hawkish Bank of Japan, capital beginning to return to Japan, and genuine global demand for Japanese bonds at yields not seen in a generation all support a continued move higher for the currency.

If the carry trade unwinds further, the markets most at risk are those with the most leverage and the weakest fundamentals, particularly lower-quality corporate bonds and more speculative risk assets. Our highest-conviction currency view remains the Japanese yen. On credit, we stay selective, favouring Asian borrowers with strong balance sheets and reliable cash flows. Where spreads do not reflect the real risks being taken, patience is the right response.

The yen is sending a clear signal. We think it is worth listening to. 

¹ Bloomberg, First Sentier, July 2026
² Bloomberg, First Sentier, September 2026
³ Reuters, 04 September 2026
⁴ Bloomberg, First Sentier, September 2026
⁵ Reuters, 08 September 2026