It’s easy to get distracted by a swirl of headlines — especially in the holiday season. With Fed activity, jobs reports, and of course, politics dominating, many investors could be forgiven for missing out on one of most significant, simmering stories of 2025: the unwinding of the Japan carry trade.
See more: What Do Investors Do With the November Jobs Report?
The Bank of Japan’s decision to raise rates this past Friday from 0.5% to 0.75% brought borrowing costs to levels not seen in decades and has added to concerns about the unwinding of the globally popular yen carry trade. The carry trade, while having myriad, profoundly complex implications for global markets, is simple in execution.
The Japan Carry Trade: Unwinding to Accelerate?
For decades, the BOJ’s negative interest rates made borrowing money in yen extremely cheap. Global investors borrowed in yen and invested that money elsewhere, with the BOJ’s policies keeping the borrowing cheap.
Since last year, however, amid growing inflation, the Japanese central bank has raised rates and begun to cut into that carry trade. While much of the yen’s response to the predicted rate hike was likely priced in, with muted impact on markets, further cuts are poised to have consequences for all kinds of investments — including U.S. bonds.
What, then, can investors do to prepare their portfolios, and bond allocations in particular, for future uncertainty? The recent, broad-based move to active ETFs may provide the solution. Going back to the ETF rule’s arrival in 2019, more and more investors are swapping their mutual fund and passively-managed strategies into the active ETF wrapper.
The ETF wrapper has powerful advantages whether passive or active, with greater tax efficiency and transparency. Active management, however, is where those benefits can really shine. Actively managed ETFs can adapt to events. A sudden liquidity crunch that ignites underlying Japan carry trade risk, for example, could see active outperform passive peers. Active ETFs can also offer tighter scrutiny of individual bond issuers. Active fixed income ETFs can also scrutinize investments for higher levels of carry trade risk if it does unwind in earnest next year.
Looking ahead, Japan carrying trade risk may seem less flashy than other geopolitical risks or domestic policy changes. Still, its potential impact on U.S. Treasurys, corporate bonds, and even equity landscapes deserves scrutiny. Active ETFs provide tools to make portfolios more resilient in face of volatility — and more adaptable when faced with opportunity.
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