Apollo says yen carry trade has broken down since 2025

The decades-old relationship between the Japanese yen and the US-Japan interest rate gap has collapsed, according to Apollo Global Management ↘ 0.10%, with the currency now driven by Tokyo's fiscal trajectory rather than yield spreads.

In an August 2 note titled "Yen outlook: From carry trade to fiscal worries," Apollo Chief Economist Torsten Slok argued that the structural break began on April 2, 2025, when sweeping US tariffs triggered volatility that made the carry trade untenable. The yen sank to roughly 164 per dollar in late July — its weakest level in four decades — even as the US-Japan yield gap narrowed to about 1.8 percentage points from nearly three points when the tariffs were announced.aljazeera+2

"The bottom line is that the yen carry trade has broken down, and the yen is no longer a rates story. Until volatility subsides, it will trade on Japan's fiscal outlook rather than the interest rate gap," Slok wrote.japantimes+1

Intervention Offers Only Temporary Relief

Japan and the United States confirmed a rare joint yen-buying intervention last week — the first coordinated action in 15 years — after the currency hit 40-year lows. Bank of Japan data suggested Tokyo may have sold as much as $58.97 billion to buy yen during the initial operation on July 30, followed by additional purchases on July 31.reuters+1

The yen strengthened to around 157–158 per dollar following the intervention. But market participants remain skeptical about lasting effects. "The market's base case appears to be that intervention may slow yen depreciation, rather than lead to lasting reversal," Vincent Chung, a portfolio manager at T. Rowe Price T. Rowe Price Group, Inc. ↗ 0.14%, told Reuters.japantimes+3

Japan's Fiscal Burden Takes Center Stage

Slok's thesis centers on Japan's ballooning debt-servicing costs. Tokyo's fiscal 2026 budget hit a record ¥122.31 trillion ($774.5 billion), with debt servicing consuming ¥31.28 trillion ($198.08 billion). The government now assumes a long-term interest rate of 3.0%, up from 2.0% a year earlier.cryptorank+1

Central government debt reached ¥1,343.8 trillion ($8.51 trillion) as of March 31, making even small yield increases costly. The Bank of Japan held its policy rate at around 1% on July 31 by an 8-1 vote, with one board member dissenting in favor of a hike to 1.25%.beincrypto+1

Robin Brooks, a former chief economist at the Institute of International Finance, echoed concerns in a separate analysis, arguing that the yen's decline reflects a debt crisis being "papered over" by yield suppression and that intervention alone cannot fix the underlying fiscal problem. The Bank of Japan next meets on September 17–18.robinjbrooks.substack+1