Japanese Stocks Continue to Reach New Highs, Yen Carry Trade Collapse Narrative Intensifies

June 3rd. Market data shows the USD/JPY pair today briefly surged above the 160 threshold, hitting a high of 160.44 before pulling back to around 159.90. At the same time, the Nikkei 225 Index broke through the 68,000 level for the first time, climbing to a session high of 68,634.74 in afternoon trading, up 2.9%. This key mark sits just below the psychological barrier that preceded major intervention from Japan’s Ministry of Finance. Latest data from Japan’s Ministry of Finance reveals that between April 28 and May 27, authorities spent a total of 11.7349 trillion yen on foreign exchange intervention—buying yen and selling foreign currencies to cap yen short positions. The most recent CFTC report (as of May 26) shows non-commercial accounts held 112,993 long yen futures contracts and 227,660 short positions, leaving a net short of 114,667, a rise of 27,152 from the prior week. Crowded yen shorts have not fully unwound; instead, traders are adding to their bets, meaning carry trades have yet to see a systemic unwind. Prior to this, the Bank of Japan (BOJ) kept its policy rate steady at 0.75% during its April meeting. But three of nine board members—Hashi Takashi, Tamura Naoki, Nakagawa Junko—publicly advocated for a rate hike to 1.0%. They also lifted their FY2026 core CPI outlook to 2.5%–3.0% and stated the BOJ would continue gradually rolling back loose monetary policy, with inflationary pressure seen as a key trigger for carry trade unwinding. However, the recent rally in Japanese equities is not driven purely by carry trade unwinding. Reuters data indicates that for the week ending May 23, foreign investors were net buyers of Japanese stocks for eight consecutive weeks, snapping up a net 1.08 trillion yen in that single week. Year-to-date cumulative net purchases are nearly 11.7 trillion yen (compared to just 742.1 billion yen at the same point last year), with funds flowing mainly into AI and semiconductor-related stocks. Several top Wall Street institutions have recently warned of unwind risks for yen carry trades, which could fuel a trading theme of “selling the dollar to buy Japanese inflation-benefiting assets.” UBS outlined a yen carry unwind scenario in April, cautioning that if the BOJ maintains a dovish tone or inflation picks up further, the dollar could weaken more. Torsten Slok, chief economist at Apollo Global Management, also flagged back in February that volatile speculative futures positions signal carry trades could “unwind rapidly.” Goldman Sachs and Morgan Stanley have previously framed carry unwinding as a long-term catalyst for Japan’s stock market, with a focus on domestic rate-sensitive and inflation-sensitive sectors. The current market narrative centers on “Japan intervention + BOJ rate hike expectations + inflation pressure,” shaping a carry trade unwind risk that’s pushing the U.S. dollar lower and lifting Japanese local stocks sensitive to rates and inflation. But as USD/JPY approaches 160 again and CFTC net shorts stay elevated, it shows global funds have not been forced to close out their yen short positions. The Nikkei 225’s strength is more a result of foreign investors chasing AI reflation trades, not just carry unwinding. This narrative is still evolving, but it is nowhere near the systemic stampede seen in August 2024. Investors need to closely watch key levels like USD/JPY 160, the next steps from Japan’s Ministry of Finance, and signals from the BOJ’s July meeting.