Why buy the Yen when you can borrow it?

European markets sprinted out of the blocks this morning, jet-fueled by news that Washington and Tokyo had finally inked a trade accord. With one fewer grenade in the tariff trench, traders rotated briskly back into risk assets. Equities rallied, base metals gleamed like war medals, and commodity currencies kicked into high gear. But in the FX cockpit, the yen hesitated—caught mid-turn between the runway of relief and the storm clouds of political succession.

The deal itself reads like a fever dream cooked up in a Manhattan steakhouse: tariffs on Japanese autos capped at 15%, down from the saber-rattled 25% threat; Japan opening the gates to U.S. rice and Boeing jets; and—most theatrical of all—a headline $550 billion Japanese sovereign wealth fund set to be deployed Stateside( USDJPY bullish), with President Trump claiming front-row influence. Whether that fund materializes or not is beside the point—the message is bold, the optics louder still.

Japanese markets did a victory lap on the back of it: the Nikkei soared over 3%, 10-year JGBs spiked 6bp, and even 1-month OIS pricing moved up 8bp. A textbook yen-bullish reaction—at least, on the surface.

Yet USD/JPY remains pinned just below 147, drifting sideways in defiance of what should be a yen-friendly cocktail: surging equities, firmer JGB yields, and headline clarity from a fresh trade pact. But FX isn't playing by the old rules—because the yen isn’t being traded on economic virtue, it's being rented out for yield. The carry trade is alive and well, and Japan's low-rate currency remains one of the market’s favourite funding tools. Why buy the yen when you can borrow it?

A fresh dose of political entropy compounds that reluctance. With Prime Minister Ishiba poised to walk the plank after his party’s humiliating Upper House defeat, Japan is staring down a familiar script—leaders who lose the chamber rarely survive two months. Political hara-kiri in Tokyo isn’t scandalous, it’s ceremonial. But for markets, the choreography breeds uncertainty: Will the next leader open the fiscal taps? Challenge the BoJ’s glide path? Or simply tread water? No one knows—and that’s reason enough to stick with the trade that’s working.

Bond traders certainly didn’t like what they saw. Wednesday’s 40-year JGB auction landed with a thud—bid-to-cover just 2.13, the weakest since 2011—despite a 3.1% coupon. With Ishiba expected to resign as soon as this month and fiscal clouds gathering, long-end duration is suddenly looking radioactive.

On the monetary side, BoJ Deputy Governor Shinichi Uchida struck a familiar, cautious tone. No urgency to hike, despite signs of sticky wage growth and evolving corporate pricing behaviour. The BoJ wants to see how the dust settles post-deal before stepping on the brakes. Our base case still leans toward an October hike, assuming inflationary pressures persist and trade frictions continue to ease—but the risk of a December delay remains.

In the near term, this mix could be toxic for yen bulls. A dovish central bank, political drift, outbound capital chasing U.S. projects—and above all, a global hunt for yield—might keep the yen on the back foot. The carry trade isn't just intact; it could start thriving. Until the Fed cuts and the BoJ steps up, JPY remains the market's cheapest ticket to ride.

Meanwhile, commodity currencies are flexing and encouraging the carry. The AUD, BRL, and ZAR are all benefiting from surging industrial metals and rising terms of trade. There’s a growing sense that raw materials may become the accidental hedge for a market worried about Powell’s job security and what comes next if the Fed gets prematurely yanked off the stage. If you're looking for a reflation trade with upside gamma, this one still has fuel.