Yen Surge Fails to Unleash Storm: The Arbitrage Code Behind U.S. Stocks' Resilience

Yen's Sudden Surge: Intervention Expectations, Market Nerves, and Short-Term Impact

The latest market anomaly has added a new variable to the discussion on yen carry trades. This Monday, the yen surged against the US dollar to its highest point in two months, sparking speculation about direct intervention by Japanese authorities to support the currency. In the first hour of Tokyo trading, the yen rose approximately 1.1% against the dollar, breaking through the 154 yen level. Previous "rate checks" conducted by US authorities on market participants were seen as a potential precursor to market intervention. Japan's last direct intervention in the foreign exchange market was in 2024, with four purchases totaling nearly $100 billion worth of yen to support the exchange rate, when the yen had fallen to around 160 against the dollar.

This market movement has also brought the frequently mentioned term in recent global macro narratives—"yen carry trade reversal"—back into focus.

The Tension Between the Market Narrative of "Carry Trade Reversal" and Reality

Maitong MSX Research Institute believes the current market environment presents a narrative structure where the Bank of Japan is gradually exiting its ultra-loose policy, leading to rising long-term rates; the Federal Reserve is entering an interest rate cut expectation phase, causing the US-Japan interest rate differential to narrow; theoretically, the interest rate foundation supporting global carry trades is shaking. Within this narrative framework, a logical inference is that carry trade funds using the yen as a funding currency to allocate to US dollar assets will be forced to unwind or repatriate, and the withdrawal of Japanese capital will impact global risk assets, especially US stocks.

However, the problem is that the market is not cooperating with this story. Despite Monday's sharp yen appreciation, the yen has not shown sustained, one-sided significant appreciation over the past week or longer. While US stocks have experienced volatility, there has been no systemic sell-off, and global risk assets have not displayed typical "liquidity ebbing" characteristics. Thus, a seemingly sharp yet crucial question emerges: if the carry trade is "reversing," why are its traces almost invisible in prices, fund flows, and market structure?

To understand this, one must first dismantle a common misconception: the "logical deterioration" of a carry trade is not equivalent to "carry trade funds have already retreated on a large scale." Strictly speaking, only the first stage of change has occurred: the interest rate differential is no longer continuously widening, exchange rate volatility is increasing, and policy uncertainty is rising. These three points indeed weaken the cost-effectiveness of carry trades but have not created mandatory unwinding conditions. For large institutions, the criteria for exiting a carry trade are not "whether the environment has worsened," but whether the carry trade has turned negative-yielding, whether risks have increased non-linearly, and whether there exist unhedgeable tail risks. At least at the current stage, none of these three conditions have been fully triggered, resulting in carry trades entering a gray area of "no longer comfortable, but still sustainable."

Why Are Carry Trade Funds Still In the Market? Interest Differentials, Structure, and Trigger Conditions

After in-depth analysis, Maitong MSX Research Institute believes the core reasons why carry trade funds "should theoretically flow back" but have not done so on a large scale stem from three points, and hard data can more intuitively reveal the underlying truth—the truth lies not in being "invisible," but in the math still being profitable.

First, the interest rate differential still exists, only its marginal attractiveness has decreased, and the "safety cushion" remains substantial.

Whether a carry trade collapses depends on whether borrowing yen to buy US dollar assets remains profitable. Data shows the interest rate differential buffer is sufficient to absorb current exchange rate volatility. As of January 22, 2026, the actual US federal funds rate is 3.64%, while the Bank of Japan's policy rate remains at 0.75% (raised to this level in December 2025, unchanged at the January 2026 meeting), resulting in a nominal interest rate differential of 2.89% (289 basis points). This means carry trades only incur losses if the yen appreciates by more than 2.9% annually.

Although the yen spiked 1.1% this Monday, as long as this appreciation does not form a long-term trend, for traders with nearly 3% annualized returns, it is merely a "profit retracement" rather than a "principal loss," which is also the core reason for the lack of large-scale unwinding. Meanwhile, the real interest rate differential further strengthens the carry trade incentive: Japan's CPI remains at 2.5%-3.0%, resulting in a real interest rate of -1.75% to -2.25% after inflation, meaning borrowers are effectively subsidized in purchasing power; whereas the US real interest rate is about 1% (3.64% rate minus 2.71% inflation). This nearly 3% real interest rate differential supports carry trades far more effectively than verbal intervention.

Second, modern carry trades have long become "invisible," a structural change most easily overlooked yet most critical by the market.

In many people's imagination, yen carry trades are still a simple chain of "borrow yen → exchange for dollars → buy US stocks → wait for interest differential and asset appreciation." However, in reality, a large volume of transactions are executed through FX swaps and cross-currency basis trades, with exchange rate risks systematically hedged via forwards and options. Carry trade positions are embedded within multi-asset portfolios rather than existing in isolation.

This means carry trade funds do not need explicit actions like "selling US stocks—buying back yen" to achieve risk reduction. They can adjust by not rolling over positions, reducing leverage multiples, extending holding periods, or letting positions naturally expire, causing capital repatriation to manifest as hidden characteristics like reduced new fund inflows and stagnant existing funds.

Third, true "forced unwinding" requires extreme conditions, and current speculative positions have not "surrendered" at all.

Historically, yen carry trade stampedes require a triple shock of rapid, substantial yen appreciation, simultaneous decline in global risk assets, and sudden tightening of funding liquidity—conditions not present in the current market. CFTC (Commodity Futures Trading Commission) data shows that as of January 23, 2026, non-commercial (speculative) net yen positions were -44,800 contracts. Although reduced from the 2024 peak (over -100,000 contracts), they remain in net short status. This indicates speculative funds are still shorting the yen, not turned net buyers. As long as this data does not turn positive, the so-called "great retreat" is a false proposition.

Furthermore, survivor bias after the April 2025 "crash" has reduced the current market's sensitivity to volatility. In April 2025, the VIX index spiked to 60, and that tariff war already washed out all fragile funds with leverage exceeding 5x. As of January 2026, the current VIX index is only 16.08, with panic levels at just one-quarter of the previous peak. Today's market participants are survivors who weathered VIX 60; a mere 1.1% exchange rate fluctuation doesn't even require them to adjust margin.

The Unrealized Unwinding and the Already Occurring Changes: Subtle Shifts in US Stock Market Structure

However, Maitong MSX Research Institute also reminds readers that if we shift focus from "whether a blow-up occurs" to changes in market structure, the impact of carry trades has indeed manifested, albeit in a more concealed manner.

First, US stocks have become more sensitive to interest rate and policy signals. Recently, fluctuations in US Treasury yields of the same magnitude have had a noticeably amplified impact on growth and tech stocks. This often indicates declining risk tolerance among marginal funds. Once carry trade funds no longer provide "stable passive inflows," market pricing of macro variables becomes more fragile.

Second, US stock gains increasingly rely on "endogenous funds." The supportive role of corporate buybacks on indices has strengthened, while the marginal contribution of foreign funds has declined. Sector rotation has accelerated, but trend sustainability has weakened. This is not typical "capital withdrawal" but rather resembles a market maintaining itself as external liquidity expansion ceases.

Finally, volatility is suppressed but highly sensitive to shocks. During the "defensive" phase of carry trade funds, markets often appear calm yet fragile, with low volatility normally, but reactions are rapidly amplified once policy or data shocks occur. This is a typical characteristic of a high-leverage system de-risking without fully deleveraging.

Beneath the Stable Surface: Wait-and-See Sentiment and a Postponed Adjustment

Maitong MSX Research Institute believes that on the day the carry trade truly collapses, the market won't discuss it repeatedly beforehand. When one sees simultaneous intraday sharp yen appreciation, synchronized US stock declines, rapidly widening credit spreads, and uncontrolled volatility spikes, it's already the result phase. Currently, the market remains in a more delicate position—the carry trade logic has been shaken, but the system is still delaying.

This is the most counterintuitive aspect of the current global market: the real risk does not come from changes that have already occurred, but from those "changes that have not yet happened but are accumulating." If the yen carry trade was once the invisible engine of global risk assets, today it resembles a machine slowing down but not yet shut off, with US stocks driving over this speed bump.

Data doesn't lie. As long as the Japan-US interest rate differential remains at 289 basis points and speculative positions hold 44,000 net short yen contracts, US stocks won't crash due to yen fluctuations. The current market stability is essentially because the mathematical threshold for mandatory withdrawal has not been reached, not due to deliberate support from macro narratives.