The Japanese yen has weakened to a 40-year low against the US dollar, raising concerns about a potential unwinding of the global yen carry trade. This shift could trigger market volatility and impact emerging markets, including India, by forcing leveraged investors to liquidate positions. Investors are tracking potential interest rate hikes by the Bank of Japan as a key trigger for market movement.
Detailed Coverage
The Japanese yen has hit a historic low, trading past 163 against the US dollar—a level not witnessed in approximately four decades. This sharp decline is largely driven by a growing trade deficit in Japan, which stood at 406.9 billion yen in June 2026. Higher import costs for commodities like crude oil have put significant pressure on the currency, forcing the Bank of Japan (BOJ) into a difficult position regarding its long-standing ultra-loose monetary policy.
Impact on Global Liquidity
For many years, the yen has been the preferred currency for the global carry trade. Because Japanese interest rates remained near zero, international investors borrowed yen at very low costs to invest in assets with higher returns in other countries. This strategy provided vast liquidity to global financial markets. However, if the Bank of Japan chooses to increase interest rates to defend the yen, the cost of this borrowed money will rise. Investors would then be forced to sell their global assets to pay back their yen loans, a process known as unwinding. This creates a risk of sudden and sharp selling pressure across global stock markets.
Historical Context and Market Memory
Investors are mindful of the volatility seen in the summer of 2024, when the yen moved rapidly from 162 to 153 against the dollar. During that period, a surprise rate hike by the BOJ and intervention in currency markets led to a swift liquidation of leveraged positions, causing global equity markets to stumble. The current situation echoes those concerns, as policymakers have again signaled they are ready to take decisive action to stabilize the currency.
Implications for Indian Investors
While India is not the direct target of these yen-funded trades, it remains part of the global financial system. If global funds face a liquidity crunch, they often reduce their exposure to emerging markets to raise cash. Currently, Japanese investors hold approximately Rs 1.94 lakh crore in Indian equities. While this is a small fraction of total foreign holdings, a broader global sell-off could lead to indirect pressure on Indian stock prices and the rupee.
However, the Indian market has shown resilience due to strong support from domestic institutional investors and consistent monthly flows through systematic investment plans (SIPs). These domestic factors act as a potential cushion against global shocks. The key update for investors will be any official move by the Bank of Japan regarding interest rates, as this will determine the pace at which the carry trade unwinds. Monitoring global market volatility indices and currency fluctuations will provide early signals of how this situation is evolving.