Apollo Global Management says the decades-old link between the dollar-yen exchange rate and the US-Japan interest rate gap has broken down. Chief Economist Torsten Slok dates the break to April 2, 2025, when sweeping US tariffs triggered a volatility spike that made the yen carry trade unprofitable, causing traders to cut exposure even as the yield gap remained wide. The yen sank to about 164 per dollar in late July, its weakest in four decades, despite the 10-year yield gap narrowing to roughly 1.8 percentage points. Slok argues that Japan's fiscal outlook now moves the currency, pointing to a record fiscal 2026 budget of ¥122.31 trillion with debt servicing costs of ¥31.28 trillion and a government assumption of a 3.0% long-term interest rate, up from 2.0%. Central government debt reached ¥1,343.8 trillion on March 31, and Prime Minister Sanae Takaichi's plan relies on ¥29.58 trillion of fresh borrowing. Japan bought yen on July 30 and Washington joined a day later, but few expect a lasting reversal, and the Bank of Japan next meets on September 17 and 18.
Apollo Global Management LLC Class AApollo's chief economist discusses the breakdown of the yen carry trade and its implications for currency markets, but the article does not state a direct impact on Apollo's business.
The article explains that the yen carry trade has broken down and Japan's fiscal outlook now drives the currency, with the yen weakening to 164 per dollar despite a narrowing yield gap.
