USD/JPY carry trade shifts as US-Japan rate divergence narrows

USD/JPY faces structural headwinds as the US-Japan interest rate differential continues to compress, threatening the popular yen carry trade. Rising long-end US Treasury yields have failed to offset concerns about narrowing policy rate gaps between the Federal Reserve and Bank of Japan. Current forward rate markets suggest this convergence will accelerate through 2025, potentially unwinding significant yen short positions estimated at $15 billion. The pair currently trades near 150.00, down from recent highs above 152.00. Volatility remains subdued but positioning data shows increasing nervousness among carry traders. Technical analysis reveals strong resistance at 151.50 (November high) while support emerges at 148.50 (100-day moving average). The shifting rate dynamics could trigger substantial yen strength if US economic data disappoints or BOJ signals earlier policy normalization. Traders should monitor upcoming FOMC and BOJ meetings for policy divergence clarity.