The Japanese yen’s sharp rebound is disrupting the carry trade (borrowing cheaply to buy higher-yielding assets) ahead of an expected Bank of Japan rate increase next week. The yen, which reached 40-year lows in July and prompted joint U.S.-Japan intervention, strengthened to 152.89 per dollar on Tuesday from around 160 less than a week earlier. Cross-border yen borrowing, a proxy for the trade, reached a record 360 trillion yen ($2.35 trillion) in March, according to a Jefferies analysis of Bank for International Settlements data. Traders are cutting yen-short positions as stop-loss orders (automatic trades triggered at preset levels) accelerate the move, while the yen has gained almost 5% against the Mexican peso and Turkish lira in September. Tokyo Tanshi data puts the odds of a 25-basis-point BOJ rate increase to 1.25% at 97%, compared with 52% a month earlier; the data also show 27% odds of an October increase and 61% odds of a December increase. Analysts are comparing the current positioning with the disorderly unwind after a BOJ hike in 2024, but say investors are better prepared and Japan’s higher bond yields mean capital no longer needs to leave the country to seek returns. The outcome after September 18 may show whether the yen’s gains represent a durable repricing of funding costs or another short squeeze. Traders remain cautious about rebuilding yen shorts because of intervention risk, and the carry trade now carries a political risk premium.