On June 3, the USD/JPY pair intraday touched 160.44, a new high since July 2024. On the same day, the Nikkei 225 index broke above 68,000 for the first time, peaking at 68,634.74. When these two figures are viewed together, an familiar narrative immediately emerged in the market: “The carry trade is about to collapse—August 2024 is about to repeat.”
Half of this narrative is correct. The other half, the data tells a completely different story.
The shorts haven't closed their positions; instead, they're doubling down.
The most direct indicator of the crowdedness of yen carry trades is the Non-Commercial Positioning Report published weekly by the U.S. Commodity Futures Trading Commission (CFTC), which tracks the net long or net short positions of speculative traders in the yen futures market.
According to the CFTC positioning report, as of the week ending May 26, non-commercial accounts held a net short position in Japanese yen futures of 114,667 contracts—112,993 long and 227,660 short—representing an increase of 27,152 contracts in net short exposure compared to the prior week.
As shown in the chart, a counterintuitive trend is evident. In July 2024, USD/JPY reached a high near 161, at which time the CFTC net short position stood at a historical extreme of approximately -180,000 contracts. Shortly thereafter, in early August, an unexpected interest rate hike by the Bank of Japan (BOJ), combined with significantly weaker-than-expected U.S. non-farm payrolls data, triggered a forced unwinding of yen shorts within just a few weeks. The net short position rapidly contracted from around -180,000 contracts and by the second quarter of 2025 had reversed into a net long position exceeding +177,000 contracts—indicating a systemic squeeze in carry trades during that period.
However, the subsequent developments were completely opposite to the "short squeeze narrative." Starting at the end of 2025, net yen short positions began to rebuild, turning negative in February 2026 and rapidly expanding to -102,000 contracts by April. By May 26, net short positions had reached -114,667 contracts. As USD/JPY returned to around 160, global speculative capital was not fleeing—it was continuing to increase its bets.
This means that if the BOJ signals a more hawkish stance at its July meeting, or if U.S. economic data again comes in significantly weaker than expected, this net short position of -114,667 contracts could face passive liquidation pressure similar to that seen in August 2024. The Japanese Ministry of Finance is also aware of this—between April 28 and May 27, it deployed a record ¥11.7349 trillion to buy yen and sell foreign currency in an effort to curb short positions.
The maximum single-round intervention failed to hold at 160.
The Japanese Ministry of Finance's history of foreign exchange intervention dates back to 1998. In the autumn of 2022, when the yen fell to around 152, the Ministry conducted its first "buy yen" intervention since 1998: injecting ¥2.84 trillion in September and an additional ¥6.34 trillion in October, for a total of approximately ¥9.18 trillion. This intervention briefly pushed USD/JPY back from 152 to around 127, but the effect lasted only a few months.
In spring 2024, the USD/JPY again approached 160 and briefly breached it, prompting the Ministry of Finance to intervene with approximately JPY 9.8 trillion—the largest single intervention since 2022 and the first officially confirmed buy intervention since 2022.
According to the Japanese Ministry of Finance’s monthly intervention data released on May 29, 2026, the intervention conducted from April 28 to May 27 amounted to ¥11.7349 trillion (approximately $73.6 billion), the largest single intervention on record, exceeding the total intervention volume for all of 2022 and surpassing the spring 2024 intervention by nearly ¥2 trillion.
However, less than a week after the Ministry of Finance disclosed its figures, USD/JPY surged back above the 160 level. Even the largest intervention failed to fully hold this psychological barrier.
Foreign investors are buying Japanese stocks to chase AI, not risk-off funds triggered by carry trade unwinding.
If the carry trade is still crowded, why is the Nikkei 225 still hitting new highs?
According to Reuters, citing data from the Japan Exchange Group (JPX), overseas investors have net purchased Japanese stocks for the eighth consecutive week through the week ending May 23, with a weekly net buying volume of 1.08 trillion yen. The cumulative net buying amount for the year has reached nearly 11.7 trillion yen.
In the same period of 2025, foreign investors' cumulative net purchases amounted to just 742.1 billion yen. In 2026, this figure is 15.8 times higher.
The flow of funds was highly concentrated. Among the top-performing stocks during the same period, AI investment platform SoftBank Group rose 17.62% week-over-week, and chip designer Socionext increased 12.26%. Reuters’ report directly attributed the buying momentum to NVIDIA’s earnings outlook, which boosted expectations for AI and semiconductor demand, prompting foreign investors to favor this theme through the Japanese market.
This is fundamentally different from the logic behind the "carry unwind selling" in August 2024, which involved forced liquidations and indiscriminate selling as capital exited the Japanese market. In contrast, the net foreign buying in 2026 represents an active decision to enter the Japanese market to capitalize on the AI-driven reflation trend. The underlying drivers differ, and so do the implications for the Nikkei Index.
Higher interest rates aren't suppressing the stock market, but this relationship is becoming more fragile.
Another counterintuitive aspect of the Nikkei 225 is its continued rise amid the Bank of Japan’s consecutive interest rate hikes.
According to the Bank of Japan's (BOJ) past policy decisions, the interest rate hiking path over the past two years has been as follows: In March 2024, the BOJ ended its negative interest rate policy, raising the policy rate from -0.1% to 0.1%; in July 2024, it further hiked rates to 0.25%; in January 2025, rates were raised to 0.5%; and in December 2025, rates were increased to 0.75%, the highest level since 1995. At the April 2026 meeting, the BOJ held the rate steady at 0.75%, but approved the decision by a 6-to-3 vote—with three members (Hajime Takada, Naoki Tamura, and Juniko Nakagawa) explicitly advocating for a hike to 1.0%.
The chart clearly shows that the correlation between interest rate hikes and the performance of Japanese equities varies significantly across different periods. The July 2024 rate hike triggered a historic single-day plunge of 12.4% in the Nikkei 225—this was due to the simultaneous impact of the BOJ’s rate hike and U.S. non-farm payroll data, which directly ignited a carry trade unwinding. In contrast, the rate hikes in January and December 2025 coincided with the Nikkei 225 rising steadily from around 40,000 points to its current all-time high of 68,634 points.
The reason behind this is not complicated: when foreign capital buys assets based on the logic of chasing AI and reflation, rather than relying on the low interest rate cost of funding in yen, the BOJ’s modest rate hike has a relatively limited impact on this portion of capital. Of course, this relationship is not static—if the BOJ truly raises rates to 1.0% at its July meeting, while the dollar weakens due to other factors, and the funding cost of carry trades surges sharply, the two curves may once again become correlated.
When viewed together, these three charts form a relatively complete conceptual framework: the yen short position remains crowded, the Finance Ministry’s largest-ever intervention failed to hold 160, yet the rally in Japanese stocks to new highs is driven by foreign capital flowing into AI-related stocks—these three facts are simultaneously true, they do not contradict each other, and none alone can predict what will happen next.