It wasn't a carry trade unwind that saved Japan's stock market: Yen shorts remain crowded, AI-driven foreign capital is the real driving force behind the new highs

On June 3, the USD/JPY pair briefly touched 160.44, its highest level since July 2024. On the same day, the Nikkei 225 index broke through the 68,000-point mark for the first time, reaching a high of 68,634.74 points. With these two figures coinciding, a familiar narrative immediately emerged in the market: "The carry trade is about to implode, August 2024 is about to repeat itself."

This narrative is only half right. The other half of the data tells a completely opposite story.

Short Sellers Haven't Fled; They're Doubling Down

The most direct indicator for measuring the crowding of the yen carry trade is the weekly non-commercial positions report released by the U.S. Commodity Futures Trading Commission (CFTC). It records the net long or net short positions of speculative traders in the yen futures market.

According to the CFTC's Commitments of Traders report, as of the week ending May 26, non-commercial accounts held a net short position of 114,667 contracts in yen futures — with 112,993 long contracts and 227,660 short contracts. This represents an increase of 27,152 contracts in net shorts compared to the previous week.

The chart reveals a somewhat counterintuitive trend. In July 2024, USD/JPY hit a high near 161, at which point CFTC net shorts were around -180,000 contracts, a historical extreme. Shortly after, in early August, the Bank of Japan's (BOJ) surprise rate hike, coupled with U.S. non-farm payroll data significantly missing expectations, led to a forced liquidation of yen shorts within just a few weeks. Net shorts sharply contracted from around -180,000 contracts, even reversing to a net long position of over +177,000 contracts by Q2 2025 — the carry trade indeed experienced a systemic squeeze during that period.

However, the subsequent trajectory has been completely opposite to the "squeeze narrative." Starting from late 2025, net short yen positions began to accumulate again, turning negative in February 2026 and rapidly expanding to -102,000 contracts by April. By May 26, net shorts had reached -114,667 contracts. As USD/JPY returns to around 160, global speculative capital is not fleeing but rather continuing to add to their positions.

This implies that if the BOJ signals a more hawkish stance at its July meeting, or if U.S. economic data unexpectedly weakens again, these -114,667 net short positions will face forced liquidation pressure highly similar to August 2024. Japan's Ministry of Finance is also aware of this — between April 28 and May 27, it used a record 11.7349 trillion yen to buy yen and sell foreign currency in an attempt to suppress the shorts.

Largest Single Intervention Fails to Defend 160

The Japanese Ministry of Finance's history of foreign exchange intervention dates back to 1998. In the autumn of 2022, when the yen fell to around 152, the MOF deployed "buy yen" operations for the first time since 1998: 2.84 trillion yen in September, followed by an additional 6.34 trillion yen in October, totaling approximately 9.18 trillion yen. That intervention temporarily pushed USD/JPY back from 152 to around 127, but the effect lasted only a few months.

In spring 2024, as USD/JPY again approached and briefly broke through 160, the MOF intervened with about 9.80 trillion yen. This was the largest single operation since 2022 and marked "the first confirmed buying intervention since 2022."

According to monthly intervention data released by Japan's Ministry of Finance on May 29, 2026, the intervention operation from April 28 to May 27 amounted to 11.7349 trillion yen (approximately $73.6 billion). This is the largest single intervention on record, surpassing the total intervention amount for the entire year of 2022 and nearly 2 trillion yen more than the spring 2024 effort.

Yet, less than a week after the MOF disclosed these figures, USD/JPY once again broke above the 160 mark. The largest-ever intervention failed to fully defend this key psychological level.

Foreign Buying of Japanese Stocks: Chasing AI, Not Capital Fleeing Carry Unwind

If the carry trade remains crowded, why is the Nikkei 225 still hitting new highs?

According to Reuters, citing data from the Japan Exchange Group (JPX), foreign investors were net buyers of Japanese stocks for the 8th consecutive week as of the week ending May 23, with net purchases reaching 1.08 trillion yen in a single week. Cumulative net purchases for the year have approached 11.7 trillion yen.

In the same period of 2025, cumulative net buying by foreign investors was only 742.1 billion yen. The 2026 figure is 15.8 times that amount.

The destination of these funds is highly concentrated. Among the top-performing individual stocks during the same period, AI investment platform SoftBank Group rose 17.62% in a single week, while chip designer Socionext gained 12.26%. Reuters directly attributed the buying impetus to Nvidia's earnings outlook, which boosted prospects for AI and semiconductor demand, prompting foreign capital to pursue this theme via the Japanese market.

This is completely opposite to the logic of the "August 2024 carry unwind triggering a sell-off." That event was characterized by forced deleveraging and indiscriminate selling, with capital exiting the Japanese market. In contrast, the 2026 foreign net buying represents an active choice to enter the Japanese market to chase the AI reflation trade. The driving mechanisms are different, and their implications for the Nikkei index are also different.

Rate Hikes Don't Depress Stocks, But This Relationship is Getting More Fragile

Another counterintuitive aspect of the Nikkei 225 is its continued rise against the backdrop of consecutive BOJ rate hikes.

According to past BOJ policy statements, the rate hike path over the past two years is as follows: March 2024 ended the negative interest rate policy, raising the policy rate from -0.1% to 0.1%; July 2024 raised it again to 0.25%; January 2025 raised it to 0.5%; December 2025 raised it to 0.75%, the highest level since 1995. The April 2026 meeting maintained the rate at 0.75%, but passed with a 6-3 vote — three board members (Hajime Takata, Naoki Tamura, Junko Nakagawa) explicitly advocated for a hike to 1.0%.

The chart clearly shows that the correlation between rate hike events and Japanese stock market movements differs completely across phases. The July 2024 rate hike triggered a historic one-day 12.4% plunge in the Nikkei 225 — this was because the BOJ's rate hike coincided with weak U.S. non-farm payroll data, directly igniting the carry unwind. However, the two rate hikes in January and December 2025 were accompanied by the Nikkei 225 climbing from around the 40,000 level to its current all-time high of 68,634 points.

The reason for this is not complex: when the fundamental logic for foreign buying is chasing the AI reflation theme, rather than relying on low yen funding costs, small BOJ rate hikes have a relatively limited impact on this capital. Of course, this relationship is not immutable — if the BOJ's July meeting genuinely pushes rates to 1.0%, while the U.S. dollar weakens due to other factors, significantly raising the funding cost for the carry trade, the trajectories of these two curves could recouple.

Putting these three charts together provides a relatively complete framework for understanding: yen shorts remain crowded, the MOF's largest-ever intervention failed to defend 160, yet the driver for Japanese stock market highs is the AI-driven foreign capital inflow — these three things can all be true simultaneously, are not contradictory, and none alone can predict what happens next.