Yen funding cost
Updated
Summary
Yen funding cost is the interest rate a borrower pays to raise yen, the cost side of the yen carry trade. AA measures it with four official series. The anchor is the Bank of Japan's (BOJ) policy guideline for the uncollateralized overnight call rate, now around 1.25%. The actual daily call rate is the same series the BOJ lists as TONA (Tokyo Overnight Average rate), Japan's yen risk-free reference rate. Short-term Treasury bill yields show the cost for terms of three months to a year. The carry spread is the gap between US and Japanese short rates: the effective federal funds rate was 3.88% on 2026-10-20, so the overnight gap is roughly 2.6 points. For investors who hedge, the cost also depends on the FX-swap cross-currency basis, which AA could not find on a current primary page.
Key numbers
BOJ uncollateralized overnight call rate guideline: around 1.25% (deposit facility 1.25%, basic loan rate 1.5%) (as of 2026-09-24). Source: boj.or.jp
Call rate (TONA), monthly average: September / August 2026: 1.043% / 0.977% (as of 2026-09-30). Source: stat-search.boj.or.jp
Call rate (TONA), latest daily value: UNKNOWN (BOJ daily file not readable in this pass) (as of 2026-10-21). Source: boj.or.jp
Call rate position vs deposit-facility floor (FY2025): about 2-2.5 bp below (0.475-0.480% vs 0.5%; 0.725-0.730% vs 0.75%) (as of 2026-03-31). Source: boj.or.jp
Effective federal funds rate: 3.88% (as of 2026-10-20). Source: federalreserve.gov
Federal funds target range: 3.75-4.00% (raised 2026-09-16, 12-0) (as of 2026-09-16). Source: federalreserve.gov
Overnight carry spread: EFFR minus BOJ guideline (AA arithmetic): about 2.63 points (3.88% - 1.25%) (as of 2026-10-20). Source: federalreserve.gov
Policy-rate gap after December 2025 moves (AA arithmetic, range midpoint 3.625% vs 0.75%): about 2.88 points (as of 2025-12-22). Source: boj.or.jp
US 3-month Treasury bill / Japan 3-month T-bill: 4.08% / UNKNOWN now (BOJ cited about 0.85% in FY2025) (as of 2026-10-20). Source: federalreserve.gov
Uncollateralized overnight call volume (FY2025): about ¥3-4 trillion a day (as of 2026-03-31). Source: boj.or.jp
Cross-border yen-denominated bank claims: $880 billion (¥133 trillion) (as of 2024-03-31). Source: bis.org
USD/JPY 3-month FX-swap forward premium in 2022 (hedging cost): rose from 0.3% to 5.5%; current value UNKNOWN (as of 2025-12-08). Source: bis.org
Timeline
2026-10-20 — Fed H.15: effective fed funds 3.88%, 3-month bill 4.08%, 1-year 4.51%. (Source: federalreserve.gov)
2026-09-24 — BOJ 1.25% call-rate guideline takes effect (decided 2026-09-18, 7-2). (Source: boj.or.jp)
2026-09-16 — FOMC raises the fed funds range to 3.75-4.00%, 12-0, keeping the carry spread wide. (Source: federalreserve.gov)
2026-07-31 — BOJ holds at 1.0% by 8-1; Takata proposes 1.25%. (Source: boj.or.jp)
2026-06-16 — BOJ raises the guideline to around 1.0%, effective 2026-06-17 (7-1). (Source: boj.or.jp)
2025-12-19 — BOJ raises the guideline to around 0.75%, effective 2025-12-22, unanimously. (Source: boj.or.jp)
2025-12-10 — FOMC cuts the fed funds range to 3.50-3.75% (9-3). (Source: federalreserve.gov)
2025-12-08 — BIS Quarterly Review on FX hedging: Japanese life insurers cut hedge ratios from about 60% to 40%. (Source: bis.org)
2025-01-24 — BOJ raises the guideline to around 0.5%, effective 2025-01-27 (8-1). (Source: boj.or.jp)
Key actors and links
Bank of Japan (actor:bank-of-japan): Sets the call-rate guideline (around 1.25%) that anchors yen funding cost, and publishes the daily call rate (TONA).
Federal Reserve (actor:federal-reserve): Sets the dollar leg of the carry spread; its 2026-09-16 hike to 3.75-4.00% offset part of the BOJ's tightening.
Yen carry trade (theme:yen-carry-trade): This indicator is the cost side of the carry trade; the spread over US rates is its incentive.
Yen carry unwind / reverse-carry stress (theme:yen-carry-unwind): A fast rise in yen funding cost relative to US rates is the trigger path for an unwind.
Japanese yen (asset:jpy): Funding cost and the exchange rate together set the carry return; a yen rise can erase months of spread.
BOJ policy rate and expected path (indicator:boj-rate-expectations): Expected BOJ hikes move 3- to 12-month yen bill yields before the overnight rate changes.
Fed funds / policy rate (indicator:fed-funds-rate): The effective fed funds rate (3.88% on 2026-10-20) is the dollar comparator for the overnight carry spread.
Hedging-cost changes (indicator:yen-hedging-costs): For hedged investors the cost runs through FX swaps; BIS shows the USD/JPY 3-month premium rose from 0.3% to 5.5% in 2022.
Cross-border yen borrowing proxies (indicator:yen-borrowing-proxies): BIS counts $880 billion of cross-border yen bank claims (Q1 2024): the quantity that this price applies to.
JGBs (market:jgb): Short JGB and T-bill yields extend the funding curve beyond overnight; the BOJ cited 3-month bills near 0.85% in FY2025.
BOJ normalization (policy:boj-normalization): Each normalization step has raised the call rate in line with the guideline, about 2-2.5 bp below the floor.
Japanese life insurers (actor:japanese-life-insurers): Largest hedgers of dollar assets; BIS reports their hedge ratio fell from about 60% to 40%.
July-August 2024 yen carry unwind (event:2024-07-yen-carry-unwind): Template for what happens when yen funding cost rises unexpectedly alongside weak US data.
Why it matters now
The BOJ has raised the yen policy rate by half a point in nine months, from around 0.75% (effective 2025-12-22) to 1.0% (2026-06-17) and 1.25% (2026-09-24). The market rate follows the target closely. The monthly average call rate was 0.477-0.478% from July to November 2025, 0.727-0.728% from January to May 2026, 0.977-0.978% in July and August, and 1.043% in September, a month that straddled the last hike. In fiscal 2025 the BOJ says the rate sat at 0.475-0.480% against a 0.5% deposit rate and at 0.725-0.730% against 0.75%, so it trades about 2-2.5 basis points under the floor.
But the carry spread has narrowed much less than the yen rate has risen, because the Fed also moved. The Fed cut to 3.50-3.75% on 2025-12-10 and then raised to 3.75-4.00% on 2026-09-16, unanimously. Inference (AA): measured from range midpoints, the policy gap was about 2.88 points after both December 2025 moves and about 2.63 points now; 50 basis points of BOJ hikes bought only 25 basis points of narrowing. At three months the gap is similar: US bills yielded 4.08% on 2026-10-20, while the BOJ reported Japanese 3-month bill yields of around 0.85% during fiscal 2025, when the policy rate was 0.75%. The current Japanese bill yield is UNKNOWN in this pass.
The mechanism matters for the editorial thesis that higher Japanese rates make cheap yen funding less attractive. That is true in level terms, but the carry trader is paid on the spread and on the yen staying weak. The spread is still wide, so the funding-cost channel alone has not removed the incentive. The pressure point is a surprise: a faster BOJ path, or Fed cuts, would compress the spread quickly. The next tests are the FOMC on 2026-10-27/28 and the BOJ meeting on 2026-10-29/30.
Risks and open questions
Bull case: Framing: 'bull' here means yen funding stays cheap relative to dollar funding, so the carry incentive persists without a disorderly adjustment. Evidence: the overnight spread is still about 2.6 points (EFFR 3.88% vs the 1.25% guideline), and 50 basis points of BOJ hikes in 2026 narrowed it only about 25 basis points because the Fed raised rates in September. The call rate tracks the guideline tightly (about 2-2.5 bp under the floor in FY2025), so funding cost moves only when the Board votes, and the BOJ moves in steps it signals. Overnight uncollateralized volume of ¥3-4 trillion a day shows a functioning market. Inference (AA): as long as the BOJ hikes gradually and the Fed holds, yen funding gets dearer slowly and predictably, which carry positions can absorb.
Bear case: Framing: 'bear' means yen funding cost rises fast relative to dollar funding. One member (Takata) wanted 1.25% in July and two dissented against it in September, so the Board is split and the path can surprise in either direction. If the BOJ hikes again on 2026-10-30 while the Fed cuts, or merely holds, the spread compresses from two sides at once. Term rates move ahead of the overnight rate: the BOJ says 3-month bill yields rose above the policy rate on hike expectations in FY2025. The hedged channel is opaque: BIS shows FX-swap hedging costs for USD/JPY rose from 0.3% to 5.5% in 2022, and no current primary basis figure is published. Inference (AA): the risk is not the level of yen rates but a fast change in the spread, which is what preceded the August 2024 unwind.
Falsifiers: - The 'spread still wide' reading fails if the effective fed funds rate minus the BOJ guideline falls below 2 points (for example a BOJ hike to 1.5% with a Fed cut). - The 'call rate tracks the guideline' reading fails if the monthly average call rate moves more than 10 bp away from the guideline outside a hike month. - The 'hedging channel is calm' inference fails if the BOJ's October 2026 Financial System Report or a BIS publication shows a sharp widening in the USD/JPY funding premium or basis. - The 'gradual and predictable' bull case fails if the BOJ raises the guideline by more than 25 bp at one meeting.
Value accrual gate: Not a crypto asset and not a security. It is a price: what a borrower pays for yen. The spread over US rates accrues to whoever borrows yen and holds higher-yielding dollar assets, provided the yen does not rise; Japanese savers receive the low yen rate. AA does not assume any asset benefits from a given funding cost.
What to watch
BOJ Financial System Report (October 2026): any update on yen funding, FX-swap dollar funding premium and life-insurer hedge ratios. (2026-10-23); Source: boj.or.jp
FOMC decision: a cut would narrow the carry spread from the dollar side; a hike widens it. (2026-10-27 to 2026-10-28); Source: federalreserve.gov
BOJ Monetary Policy Meeting and statement: whether the call-rate guideline moves from around 1.25%. (2026-10-29 to 2026-10-30); Source: boj.or.jp
BOJ daily call rate (TONA) finals, posted around 10:00 a.m. Tokyo time each business day. (daily); Source: boj.or.jp
Fed H.15 daily: effective fed funds and Treasury bill yields for the dollar leg. (daily); Source: federalreserve.gov
BOJ amounts outstanding in the call money market (October). (2026-11-09); Source: boj.or.jp
BOJ Summary of Opinions for the October meeting: views on the neutral rate and pace of hikes. (2026-11-10); Source: boj.or.jp
AA expectation: a current official cross-currency basis series for USD/JPY will not appear on a primary page; hedging cost will stay visible only in periodic BOJ/BIS reports. (no scheduled date); speculative, no scheduled source
AA inference
Inference (AA): This node is the price input to theme:yen-carry-trade. AA reads it as a spread, not a level: the yen side (BOJ guideline and the TONA call rate) minus the dollar side (effective fed funds and US bills). On that reading, yen funding is at the highest cost of the current normalization cycle, but the incentive to borrow yen has barely shrunk in 2026 because the Fed hiked too. The view weakens if the overnight gap falls below about 2 points, or if hedged investors face a sharply wider cross-currency basis, which would show in BOJ or BIS reports before any official daily series.
Sources
BOJ, 2026-09-18: 'The Bank will encourage the uncollateralized overnight call rate to remain at around 1.25 percent', effective 2026-09-24, by a 7-2 vote (Asada Toichiro and Sato Ayano dissenting); complementary deposit facility rate 1.25%, basic loan rate 1.5%. (Source: boj.or.jp, accessed 2026-10-22)
BOJ, 2026-07-31: guideline kept at around 1.0% by 8-1; Takata Hajime proposed around 1.25%, saying conditions had entered 'a new phase in which the Bank needs to adopt a nimble approach'. (Source: boj.or.jp, accessed 2026-10-22)
BOJ, 2026-06-16: guideline set at around 1.0%, effective 2026-06-17, by 7-1 (Asada dissenting; Ueda absent). (Source: boj.or.jp, accessed 2026-10-22)
BOJ, 2025-12-19: guideline set at around 0.75%, effective 2025-12-22, unanimously. (Source: boj.or.jp, accessed 2026-10-22)
BOJ, 2025-01-24: guideline set at around 0.5%, effective 2025-01-27, by 8-1 (Nakamura Toyoaki dissenting). (Source: boj.or.jp, accessed 2026-10-22)
BOJ time series, uncollateralized overnight call rate, monthly average: 0.478% (July 2025), 0.477% (Aug-Oct 2025), 0.478% (Nov 2025), 0.557% (Dec 2025), 0.728% (Jan-Mar 2026), 0.727% (Apr-May 2026), 0.841% (June 2026), 0.978% (July 2026), 0.977% (Aug 2026), 1.043% (Sept 2026). (Source: stat-search.boj.or.jp, accessed 2026-10-22)
BOJ call money market data page: provisional daily call rates are posted around 5:15 p.m. and final results around 10:00 a.m. the next business day (Tokyo time); the final result for 2026-10-21 was released on 2026-10-22. (Source: boj.or.jp, accessed 2026-10-22)
BOJ interest rate benchmark page lists the JPY risk-free rate as the 'Uncollateralized Overnight Call Rate (Tokyo Overnight Average rate: TONA)' and says it is not necessary to obtain approval for using TONA. (Source: boj.or.jp, accessed 2026-10-22)
BOJ, Market Operations in Fiscal 2025 (August 2026): the call rate stayed at 0.475-0.480% from April 2025 to 2025-12-19 and at 0.725-0.730% from 2025-12-22, 'extremely stable at a level slightly below' the complementary deposit facility rate. (Source: boj.or.jp, accessed 2026-10-22)
BOJ, Market Operations in Fiscal 2025: 3-month T-bill yields 'rose to around 0.85 percent' amid expectations of further hikes; GC repo rates stayed close to the excess-reserve rate; uncollateralized overnight call volume was around 3 to 4 trillion yen. (Source: boj.or.jp, accessed 2026-10-22)
BOJ, Market Operations in Fiscal 2025: the US dollar funding premium via FX swaps followed a narrowing trend, which reduced overseas investors' yen-funded repo investment; the report gives no cross-currency basis figures in its text. (Source: boj.or.jp, accessed 2026-10-22)
FOMC, 2026-09-16: the Committee raised the federal funds target range by 1/4 point to 3-3/4 to 4 percent, by a 12-0 vote. (Source: federalreserve.gov, accessed 2026-10-22)
FOMC, 2025-12-10: the Committee lowered the target range by 1/4 point to 3-1/2 to 3-3/4 percent; Miran dissented for a 1/2 point cut and Goolsbee and Schmid for no change. (Source: federalreserve.gov, accessed 2026-10-22)
Fed H.15 (released 2026-10-21): effective federal funds rate 3.88% each day from 2026-10-14 to 10-20; 3-month Treasury bill (secondary market) 4.08-4.10%; 1-year constant maturity 4.51% and 2-year 4.79% on 2026-10-20. (Source: federalreserve.gov, accessed 2026-10-22)
BIS Quarterly Review, September 2024: banks' yen-denominated cross-border claims reached $880 billion (¥133 trillion) in Q1 2024 and yen loans ¥41 trillion; 'low interest rates for the Japanese yen relative to other currencies have made the yen a funding currency of choice'; hedge fund FX forward positions estimated at about $160 billion. (Source: bis.org, accessed 2026-10-22)
BIS Quarterly Review, December 2025 (Huang, Krohn, Sushko, 2025-12-08): in 2022 the 3-month FX-swap forward premium for USD/JPY hedgers rose from 0.3% to 5.5%; Japanese life insurers cut hedge ratios from roughly 60% to 40% (citing the BOJ's October 2025 Financial System Report); no yen-specific cross-currency basis figure is given. (Source: bis.org, accessed 2026-10-22)
BOJ release calendar: Financial System Report on 2026-10-23 (15:00 Tokyo time); Monetary Policy Meeting 2026-10-29/30 with statement on 10-30; call money market outstanding (October) on 2026-11-09; Summary of Opinions on 2026-11-10. (Source: boj.or.jp, accessed 2026-10-22)
Federal Reserve October 2026 calendar: FOMC meeting 2026-10-27/28; H.15 published every business day. (Source: federalreserve.gov, accessed 2026-10-22)