JPY: Volatility shock could spur rebound – MUFG

MUFG strategists Derek Halpenny, Lee Hardman and Abdul-Ahad Lockhart note that the Japanese Yen has not yet benefited from the latest volatility spike, with the BoJ’s trade‑weighted JPY index near year‑to‑date lows. However, they stress that previous volatility shocks triggered sharp JPY rallies, and a squeeze on accumulated JPY‑funded carry trades could see a counter‑trend Yen recovery if risk aversion intensifies.

Carry trade risks for Japanese Yen

"On the other hand, funding currencies such as the JPY have not rebounded. The BoJ’s trade‑weighted JPY index remains close to year‑to‑date lows. The JPY strengthened on the last two occasions when FX volatility spiked, first in April 2025 and again in the summer of 2024."

"During the last major energy price shock in 2022, the JPY was one of the worst‑performing G10 currencies (alongside the SEK), as Japan was hit by a sharp negative terms‑of‑trade shock and the BoJ maintained a cautious stance, keeping rates on hold while the Fed and other major central banks lifted rates away from the zero bound."

"This policy divergence encouraged the build-up of JPY‑funded carry trades."

"The trade‑weighted JPY has weakened significantly since that 2022 energy shock by around 23%, with over half of those losses occurring after market volatility peaked in April 2025 when Trump announced his Liberation Day tariffs."

"This price action highlights the risk that the JPY could stage a counter trend rally if the volatility shock from the conflict in the Middle East intensifies triggered by a squeeze of JPY‑funded carry positions that have been built up since the Ukraine conflict began in 2022."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)