Japanese stocks continue to rise to new highs, fueling narratives of a collapse in the yen carry trade.

According to Mars Finance, market data on June 3rd showed that the USD/JPY pair briefly broke through the 160 level (reaching a high of 160.44 before falling back to around 159.90). Simultaneously, the Nikkei 225 index broke through 68,000 points for the first time, reaching a high of 68,634.74 points in the afternoon, a gain of 2.9%. This sensitive level coincides with a psychological threshold reached before the Japanese Ministry of Finance's large-scale intervention. The Ministry of Finance recently announced that it intervened in the foreign exchange market with 11.7349 trillion yen between April 28th and May 27th, buying yen and selling foreign exchange, directly suppressing yen short positions. The latest CFTC positioning data (as of May 26) shows that non-commercial accounts held 112,993 long positions and 227,660 short positions in yen futures, resulting in a net short position of 114,667 contracts, an increase of 27,152 contracts from the previous week. The crowded yen short positions have not completely disappeared; on the contrary, they are still being increased, indicating that carry trades have not yet experienced a systemic collapse. Previously, the Bank of Japan maintained its policy rate at 0.75% at its April meeting, but three of its nine members (Hajime Takada, Naoki Tamura, and Junko Nakagawa) publicly advocated raising the rate to 1.0%, while also raising its FY2026 core CPI forecast to the 2.5%-3.0% range and indicating that it would continue to gradually adjust its easing policy. Inflationary pressures are becoming a significant factor triggering a carry trade squeeze. However, the main driver of the current Japanese stock market rally is not simply carry trade unwinding. Reuters data shows that foreign investors have been net buyers of Japanese stocks for the eighth consecutive week, with a net purchase of 1.08 trillion yen in the week alone. The cumulative total for the year is close to 11.7 trillion yen (compared to only 742.1 billion yen in the same period last year), with funds mainly flowing into AI/semiconductor related stocks. Several major Wall Street institutions have recently pointed out that yen carry trades face the risk of a squeeze, potentially driving a trading logic of "selling the dollar and buying Japanese inflation-benefiting assets." UBS outlined a scenario of yen carry trades unwinding again in April, warning that if the BOJ's tone becomes dovish or inflationary pressures intensify, the dollar may weaken further. Torsten Slok, chief economist at Apollo Global Management, also publicly warned in February that the sharp fluctuations in speculative futures positions indicate that carry trades can be "quickly unwound." Goldman Sachs, Morgan Stanley, and other institutions have previously viewed carry unwinding as a long-term catalyst for the Japanese stock market, particularly benefiting sectors sensitive to domestic interest rates and those benefiting from inflation. The current market is constructing a narrative around "Japanese intervention + BOJ rate hike expectations + inflationary pressures" to create a carry trade squeeze risk, driving down the US dollar and supporting the relative strength of Japanese domestic interest rate/inflation-benefiting stocks. However, the return of USD/JPY to around 160 and the continued high level of CFTC net short positions indicate that global funds' short positions in the yen have not yet been forcibly liquidated. The strength of the Nikkei 225 is more a result of foreign capital chasing AI reflation trades than simply carry unwinding. This narrative is still developing, but it is still far from the systemic sell-off seen in August 2024. Investors need to continue to pay attention to the USD/JPY 160 level, the extent of the Japanese Ministry of Finance's next intervention, and signals from the BOJ's July meeting.