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Yen Carry Trade Reversal Sparks FII Selling
14 Dec, 2025
Summary
- FII selling increased in India due to postponed US-India deal.
- Rising Japanese bond yields triggered yen appreciation and carry trade reversal.
- Asian indices saw significant gains in 2025, prompting profit-taking.
Indian markets experienced heightened volatility at the start of December, marked by an increase in FII selling compared to the previous month. This cautious sentiment stems from the postponement of a significant US-India deal, a widening trade deficit, and geopolitical considerations.
The shift in investor behavior was amplified by developments in Asian markets. In the second week of December, FIIs intensified profit-taking across the region, influenced by rising Japanese bond yields and a desire to secure gains after strong performances from markets like China, Japan, South Korea, and Taiwan.
The Japanese 10-year yield climbed to 1.95%, up from 1.70% a month prior. This rise in yields has caused the yen to appreciate, increasing the risk of a reversal in the yen carry trade, which could lead to widespread profit-booking in emerging markets as yen-based investments are unwound.
