As the Bank of Japan begins normalizing monetary policy by raising benchmark rates toward 1.0% and higher, the "cost of carry" rises. At the same time, other major central banks, such as the U.S. Federal Reserve, have either peaked in their rate-hiking cycles or started cutting rates to support their economies. This alignment erodes the key incentive behind the carry trade.
The "Takaichi effect"
This instability is further intensified by what analysts have dubbed the "Takaichi effect," referring to market volatility linked to Prime Minister Sanae Takaichi's bold economic policies. In early 2026, her administration indicated a shift away from fiscal restraint, proposing large supplemental budgets and cuts to the consumption tax to counter domestic inflation. While intended to boost the local economy, these actions have pushed Japanese Government Bond yields to near 20-year highs and raised concerns about fiscal dominance over the central bank.The risk is further heightened by the repatriation of Japanese capital. Domestic investors, who rank among the largest holders of foreign debt globally, are now increasingly motivated to bring funds back to Japan. With Japanese Government Bond yields climbing to levels not seen in decades, the appeal of seeking higher returns in riskier overseas markets wanes. This repatriation sets off a self-reinforcing cycle: selling foreign assets drives up the yen's value. For those still engaged in carry trade positions, a stronger yen is highly damaging,
USD/JPY is trading around 158.1, near a key multi-month resistance level. The weekly structure remains bullish, with higher highs and higher lows since early 2025. Immediate resistance lies between 158.4 and 159.0, with a break above 158.4 potentially opening the path to the psychologically significant 160.0 level. Support is found between 157.4 and 157.8, and a failure to hold 157.8 could see a retracement toward 156.8. While rates are expected to remain at 0.75%, any hawkish hints about an April hike could push the pair back toward 155.0.
This new era may signal a shift toward more disciplined, risk-adjusted investing. The era of cheap-yen carry trades may be ending, potentially forcing investors to weigh every basis point of yield against currency and political risks in Tokyo. As a result, capital may increasingly flow into high-quality, low-volatility assets, reflecting a more cautious, risk-sensitive approach to global portfolio allocation.