This year, the yen carry trade that once stirred the global markets is becoming popular again.

Based on analysis of data from the Japan Financial Futures Association, Tokyo Financial Exchange, and the U.S. Commodity Futures Trading Commission.Futures Trading Commission (CFTC)'s latest data shows that investors are significantly reducing their net short positions in US soybean, corn, and wheat contracts, easing bearish sentiment in the market.The short positions in the Japanese yen held by retail investors in Japan and leveraged funds and asset management companies overseas are estimated to have increased to $13.5 billion in November, up from $9.74 billion in October.

Short bets on the yen are expected to increase next year, as the interest rate differential remains large, the US government increases borrowing, and volatility in the forex market is low, making it more attractive to borrow yen and allocate funds to global markets with higher yields.

"The absolute interest rate differential with the yen is very large, meaning that the yen can always be viewed as a funding currency," said Alvin Tan, head of Asia forex strategy at the royal bank of canada in Singapore. "If the yen is not used as a funding currency for carry trades, the main reason is volatility."

Strategists from Mizuho Securities and Saxo Markets stated that carry trades could return to the levels seen after the Bank of Japan raised interest rates in July, causing investors to suddenly exit. However, it should be noted that a return of Trump to power could lead to turmoil in the forex market.

The widespread adoption of this investment strategy could affect global markets. The unwinding of carry trades in yen during the summer caused the global stock market to evaporate about 6.4 trillion USD in just three weeks, with the nikkei 225 index experiencing its largest decline since 1987. Last week, the yen suddenly surged, indicating that investors returning to carry trades continue to face risks.

Interest rates are one of the factors driving carry trades. The average yield of 10 high-yield G-10 currencies and emerging market currencies exceeds 6%. In contrast, the benchmark interest rate of the Bank of Japan is only 0.25%, and the yield on the yen is nearly zero.

Although the Bank of Japan is gradually raising interest rates, the yield gap with major economies such as the USA remains large. The Federal Reserve lowered rates by 25 basis points in November, bringing the target range for the federal funds rate to 4.5%-4.75%. Even if Japan raises rates to around 1%, the logic of carry trades still holds, according to Felix Ryan, forex analyst at ANZ Bank in Sydney.

This strategy has a considerable roi. Since the end of 2021, the roi of yen arbitrage trades targeting 10 major currencies and emerging markets currencies has been 45%, while the return of the s&p 500 index, considering dividend reinvestment, has been 32%. This has attracted an increasing number of investors to buy yen short positions, reaching 21.6 billion usd by the end of July.

"Even if the Bank of Japan raises interest rates, it is impossible to fully narrow the interest rate differential with the usa," said Charu Chanana, chief investment strategist at Saxo Markets. "The usa's debt and fiscal situation are clearly the top priorities of the incoming Trump administration, and there may still be room for yen arbitrage trades to remain attractive."