“Because there is an interest rate differential, it's safe for the future” 8 common mistakes in carry trades [September 2026, USD/JPY at 158 yen level due to US PMI at 5-year …
The number of people saying, “Because the interest rate differential between Japan and the US is large, I started targeting foreign currency deposits, foreign currency MMFs, and FX swap points,” has increased significantly in the last 1-2 years. In fact, on September 23-24, 2026, the USD/JPY rose from the high 157 yen range to the low 158 yen range, triggered by US economic indicators. However, placing funds in foreign currencies or high-interest currencies solely for the reason that “there is an interest rate differential” is actually a very dangerous decision. In this article, I will explain the mechanism of carry trades and 8 common mistakes that office workers tend to make, along with concrete numbers.
First of all, what are “interest rate differentials” and “carry trades”?
Let’s start by organizing the terminology.
Policy interest rateis the interest rate determined by a central bank (the Bank of Japan for Japan, the Federal Reserve Board or FRB for the US) that serves as the benchmark for banks to lend and borrow money from each other. When this policy interest rate rises, it spreads to various interest rates in the world, such as deposit interest rates and mortgage interest rates.
Interest rate differentialis, as the name suggests, the difference between the interest rate of one country and the interest rate of another country. For example, if Japan’s policy interest rate is 1.25% and the US policy interest rate is 4.00%, the interest rate differential between Japan and the US is 2.75%.
Carry tradeis a transaction where you borrow money in a low-interest currency (such as the yen), convert that money into a high-interest currency (such as the US dollar), and invest it, aiming for profit from the interest rate differential (plus any exchange rate gains if applicable). When individual investors do this via FX, they don’t actually “borrow” money, but rather obtain a similar effect by holding a position to buy foreign currency using leverage. The interest rate differential equivalent received daily at this time is calledswap points. Steadily accumulating interest through foreign currency deposits or foreign currency-denominated MMFs (Money Market Funds/investment trusts that invest in highly rated short-term financial products) is also a carry trade-like concept in a broad sense.
The point is that while the profit from this transaction is generated from the “interest rate differential,” if the exchange rate moves in the opposite direction (in this case, a stronger yen), that profit can easily be wiped out. Neglecting this is at the root of the “common mistakes” I will introduce today.
[Current Affairs Anchor] US PMI at 5-year high, USD/JPY reaches 158 yen level
Let’s look at a timely topic. In the New York market on September 23, 2026, the USD/JPY ended trading having risen from 157.76 yen to 158.40 yen. The trigger was the preliminary US Purchasing Managers’ Index (PMI) released on the same day. The manufacturing PMI was 57.0 (market forecast 53.7), the service PMI was 58.7 (forecast 55.8), and the composite PMI was 58.4 (forecast 55.3), all of which significantly exceeded market forecasts and reached a 5-year high (Zaikei Shimbun 2026-09-24, OANDA 2026-09-24).
The PMI is an indicator considered to show “economic expansion” when it exceeds 50, but this time it was strong enough to far exceed that, resulting in confirmation of the resilience of the US economy. Following this, comments from an FRB governor mentioning the necessity of additional interest rate hikes were made, and US long-term interest rates (10-year government bond yields) rose. Since the currency of a country with rising interest rates is more likely to be bought, the dollar rose across the board. On the other hand, Japan was on a holiday that day and had no major economic indicator announcements, so the material was centered on content from the US. Even so, it was reported that the decline of the yen remained limited due to “caution regarding intervention by authorities to correct the weak yen.”
What this movement symbolizes is that even after “the Bank of Japan raised the policy interest rate from 1.00% to 1.25% on September 18, 2026 (the fastest pace of rate hikes since March 2024),” if the interest rate hike expectations on the US side become even stronger, the interest rate differential could actually swing in the direction of expansion. In other words, you cannot fully read the current market with the simple diagram that “the yen will strengthen because the Bank of Japan raised interest rates.”
Trends in Japan-US policy interest rates and USD/JPY
Since it is difficult to visualize with words alone, I have summarized the trends in Japan-US policy interest rates and USD/JPY levels for the past year or so in a table. All figures are estimates (approximations based on reports and data at each point in time).
In this way, even if the Bank of Japan raises interest rates, if the US side shows an even more bullish (hawkish) stance, the interest rate differential may not shrink, and pressure for a weaker yen may continue. Conversely, the interest rate differential is not a “fixed number in one direction,” but a “living thing” that fluctuates based on the monetary policy and economic indicators of both countries. If you judge solely based on “because there is an interest rate differential” without understanding this, it is easy to lead to the mistakes introduced next.
8 common mistakes in carry trades
This is the main topic. I have organized 8 mistakes that people who are managing assets (or are about to start) with a carry trade-like concept, such as foreign currency deposits, foreign currency-denominated MMFs, and targeting FX swap points, are prone to falling into.
Mistake 1: Simplifying “interest rate differential = profitable”
When you hear an interest rate differential of 2.75%, it feels like “it will increase by 2.75% in a year,” but this is only the case if the exchange rate does not change. In reality, the exchange rate moves every day, so even if interest income is positive, if the exchange loss exceeds that, it is not uncommon for the total to fall below the principal. The starting point is the understanding that the interest rate differential is “one ingredient of profit,” not “guaranteed profit.”
Mistake 2: Using too much leverage when targeting swap points
In FX, there is a mechanism called “leverage” that allows you to trade amounts many times larger than your margin (collateral money). If you set the leverage too high because you want to increase swap points (interest rate differential income), the risk of “loss cuts,” where your margin is quickly depleted and your position is forcibly settled even by small, unexpected exchange rate fluctuations, increases. For transactions aiming to capture interest rate differentials, the iron rule is to keep leverage low and manage funds with a margin of safety.
Mistake 3: Not factoring in the possibility of foreign exchange losses
For example, if you convert 1 million yen into US dollars and place it in a foreign currency MMF (assuming an annual interest rate of around 3%), your assets will increase by about 3% after one year if the dollar-yen rate remains unchanged. However, if a carry trade unwinding (described later) occurs midway and the yen appreciates, foreign exchange losses that far exceed the interest income can occur. I will simulate this using specific numbers in the next chapter, but being in a state of “looking only at interest income and not at exchange rate risk” is extremely dangerous.
Mistake 4: Jumping into emerging market currencies under the assumption that “high interest rate currency = good deal”
Some people focus not only on the US dollar but also on currencies with even higher policy interest rates, such as the Turkish lira or the South African rand. However, currencies with high interest rates are often high-interest precisely because there is anxiety about the country’s inflation rate or creditworthiness, and the currency value itself can fall at a speed that exceeds the interest rate differential. It is closer to reality to perceive “high interest rate = large risk premium” rather than “high interest rate = good deal.”
Mistake 5: Not knowing the risk of carry trade “unwinding”
Carry trade is a transaction where investors around the world tend to build up positions in the same direction for similar reasons (to capture interest rate differentials). When these positions are liquidated all at once due to some trigger (such as interest rate hikes in low-interest countries, expectations of interest rate cuts in high-interest countries, or concerns about economic deterioration), the exchange rate swings sharply in the opposite direction. This is called “unwinding.” In August 2024, a Bank of Japan interest rate hike and weak US employment statistics coincided, leading to a global stock market decline and a sharp appreciation of the yen at the same time. Even entering 2026, multiple overseas research institutions have expressed caution, stating that “the yen carry trade remains vulnerable to unwinding.” It is worth remembering that the larger the interest rate differential, the greater the reaction is likely to be when this unwinding occurs.
Mistake 6: Linking “narrowing interest rate differentials = immediate yen appreciation” too simplistically
Many people think, “If the Bank of Japan raises interest rates and the interest rate differential narrows, the yen should appreciate immediately,” but the actual exchange rate is determined by a combination of multiple factors, not just interest rate differentials, including trade balances, investor sentiment, geopolitical risks, and economic indicators of each country. As seen in the market movements in September 2026, the fact that the dollar can strengthen and the yen can weaken due to a single strong economic indicator from the US side even after the Bank of Japan raises interest rates is a typical example of this. It is premature to conclude that “the yen’s depreciation is over because the interest rate differential has narrowed” and move your positions significantly.
Mistake 7: Looking only at the “displayed interest rate” of foreign currency deposits/MMFs and overlooking fees
Brochures for foreign currency deposits and foreign currency MMFs tend to prominently display attractive interest rates (such as around 3% per year), but there is a cost called “exchange fee (spread)” when actually exchanging yen for foreign currency. When these fees accumulate on a round-trip basis (when buying and selling), they can significantly erode the effect of the displayed interest rate. Since the level of fees varies considerably depending on the financial institution, make it a habit to compare not only interest rates but also round-trip costs.
Mistake 8: Continuing to hold aimlessly without deciding on exit (profit-taking/stop-loss) rules
Waiting aimlessly, thinking “it will return to yen depreciation eventually” without any basis, is also a common mistake. Since carry trade-style operations are, by definition, transactions with the clear objective of “capturing interest rate differentials,” it is important to decide on your own exit rules in advance, such as “I will liquidate once the yen appreciates to this point” or “I will lock in some profits once I have this much unrealized gain.” If you continue to hold emotionally without rules, you tend to be slow to respond when an unwinding occurs.
Simulation with numbers: What happens if you bet “only” on interest rate differentials?
Let’s look at the content mentioned in Mistake 3 with specific numbers. Assume a case where you exchange 1 million yen for US dollars at a timing of 1 dollar = 158 yen and invest it in a foreign currency MMF with an annual interest rate of 3.0% (before tax) for one year (this is a simple calculation that does not consider exchange fees or taxes).
1 million yen can be exchanged for approximately 6,329.1 dollars, and the interest income after one year (before tax) will be approximately 189.9 dollars, for a total of approximately 6,519.0 dollars. Depending on the rate at which you convert this back to yen after one year, the final profit or loss will change as follows.
Looking only at the 3.0% annual interest income, the calculation is “an increase of 30,000 yen in one year,” but I think this table shows that if a significant yen appreciation like a carry trade unwinding occurs, foreign exchange losses many times the interest income can occur, and the total can be a large negative. Having the sense that “the interest rate differential is just one positive factor, and foreign exchange fluctuation risk is far greater” is the basic attitude for dealing with carry trade-style operations.
What happens when an unwinding occurs? Lessons from the past
Since the term “unwinding” has come up, I will delve into it a little further. The yen carry trade is a transaction where investors around the world tend to build up positions with the same idea of “procuring low-interest yen and investing in high-interest assets.” Therefore, when liquidation (position unwinding) occurs all at once due to some trigger, the yen can sometimes surge with a larger price range than usual.
A recent memory is the case of August 2024, where a global stock market decline and a sharp appreciation of the yen occurred simultaneously, triggered by the coincidence of a Bank of Japan interest rate hike and weak US employment statistics. Even entering 2026, cautionary comments to the effect that “the yen carry trade remains vulnerable to unwinding” have been repeatedly issued by overseas research institutions.
Of course, it is impossible to accurately predict “when” or “to what extent” an unwinding will occur. However, it is safe to assume that when the three conditions of (1) the interest rate differential between Japan and the US remains large, (2) the environment is such that speculative positions are easily built up, and (3) the yen is likely to depreciate to a level where authorities are wary of foreign exchange intervention, are met, the risk of swinging in the opposite direction (sharp yen appreciation) is also correspondingly higher. September 2026 can be said to be a phase where these three conditions are likely to overlap.
Realistic steps individual investors can take starting today
Based on what we have covered so far, let’s organize the practical steps we as employees can take.
The first is to position foreign currency assets and FX swap strategies as a “satellite (minor portion)” rather than your “main asset formation.” Building on the classic foundation of long-term, diversified, low-cost asset formation like index investing via NISA or iDeCo, it is fundamental to keep foreign currency and carry trade operations to only a portion of your total assets.
The second is to keep leverage low and ensure you are operating with amounts that won’t affect your daily life even if you incur exchange losses. Especially when targeting swap points in FX, always be aware of the risks of margin calls and stop-loss orders.
The third is to rethink the idea that “a large interest rate differential equals safety,” and instead view it as “a large interest rate differential means a larger reaction when a reversal occurs.” Just keeping track of the Bank of Japan and Federal Reserve’s monetary policy meeting schedules in the news will significantly change your mindset.
The fourth is to always check the exchange fees (spreads), not just the displayed interest rates, when using foreign currency deposits or foreign currency MMFs. Costs can vary significantly between financial institutions even for the same product.
The fifth is to keep your emergency fund (6 to 12 months of living expenses for sudden needs) in yen deposits that are not subject to exchange rate fluctuations. Foreign currency and carry trade operations should only be done with surplus funds.
Summary
On September 23-24, 2026, triggered by strong US PMI data (Manufacturing 57.0, Services 58.7, Composite 58.4, all at 5-year highs), the USD/JPY rose from the high 157 yen range to the low 158 yen range. Even after the Bank of Japan raised its policy rate to 1.25% on September 18, the reality of the current market is that the interest rate differential between Japan and the US could potentially widen further due to bullish US economic indicators and expectations of additional rate hikes.
Diving into foreign currency assets or carry trade-style operations solely because “there is an interest rate differential” can be an unexpected pitfall. Interest income is just one positive factor; exchange rate risk has a much greater impact on the results. Please take the 8 examples of failure introduced today and compare them with your own investment strategy, keeping in mind the risk of a reversal. It is recommended to start by reviewing this simple principle: secure your emergency fund in yen and keep foreign currency and carry trade operations to “a portion of your surplus funds.”
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Finally, one question: Have you ever started foreign currency deposits or FX swap point strategies solely because “there is an interest rate differential”? Please let me know in the comments if you’d like.
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