What Is The Yen Carry Trade

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What Is The Yen Carry Trade

What Is The JPY Carry Trade And Why It May Be Ending

The Japanese currency has surged to multi-month highs. Now, a lot of people are thinking if this is the end of the famous JPY carry trade.

This also makes one wonder what exactly a JPY carry trade is. It involves borrowing the JPY at a low cost. The currency is then used to buy in high-yielding assets. But now, it seems that the BOJ interventions and the rate hikes from the BoJ could spell the end of this trade.

Investors Are Moving Away From Yen

Normally, investors borrow the yen and then use it to buy US Dollars, NZD, or Mexican Pesos. All of these are high-yielding currencies. For all these years, JPY has remained the default and preferred currency for investors.

After closing the JPY carry trade, investors usually convert the money back into Yen. It is then used to repay the loan. The average return on an annual basis is usually 2.5% - 3.5% on USD/JPY carry trades.

But now, people are switching to other currencies as a funding vehicle. This has happened as the BoJ has turned hawkish, and the central bank is also intervening in the markets to support the JPY.

The available data shows that investors are preferring the Swiss Franc (CHF) as the funding vehicle for the carry trade.

The JPY carry trade that has become so popular started back in 2013. At that time, rates were high in the USA while Japan was going through qualitative and quantitative easing.

These trades reached new highs when the US Fed raised rates to record highs in 2022 and 2023. But now, even the US Federal Reserve has lowered the policy rate.

It is difficult to calculate the overall value of the JPY carry trades. According to rough estimates, the cross-border Yen borrowing was near $2.34 trillion a few months ago.

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