The "carry trade" in Japanese yen is reviving
Currently, the average yield of G10 group and emerging market currencies exceeds 6%, while the Bank of Japan's benchmark interest rate is only 0.25%. Coupled with factors such as increased borrowing by the U.S. government and lower volatility in the money market, analysts believe that yen carry trades may return to the levels seen at the beginning of this year
Is the yen carry trade back?
On Tuesday, December 3rd, according to an analysis of data from the Japan Financial Futures Association, the Tokyo Financial Exchange, and the U.S. Commodity Futures Trading Commission by Bloomberg, Japanese retail investors, leveraged funds, and overseas asset management companies increased their short positions on the yen to $13.5 billion in November, up from $9.74 billion in October.
Moreover, Bloomberg expects these bets to continue rising next year due to the significant interest rate differential between the U.S. and Japan, increased U.S. government borrowing, and low volatility in the money market, making it very attractive to borrow yen and invest in higher-yielding global markets. Analysts believe that the yen carry trade may return to levels seen earlier this year.
Currently, the average yield of G10 and emerging market currencies exceeds 6%, while the Bank of Japan's benchmark interest rate is only 0.25%—although the Bank of Japan is gradually raising rates, the interest rate gap with major economies like the U.S. remains substantial.
Felix Ryan, a foreign exchange analyst at ANZ Bank, stated that even if Japan raises rates to around 1%, the logic of arbitrage trading still holds. Alvin Tan, head of Asian foreign exchange strategy at Royal Bank of Canada, remarked:
“The absolute interest rate differential compared to other currencies is very large, which means the yen will always be viewed as a funding currency.”
However, analysts such as Shoki Omori, chief Japan strategist at Mitsubishi UFJ Securities in Tokyo, warned that Trump's return to the White House could destabilize the currency market, especially with his rhetoric regarding tariff threats potentially causing significant fluctuations in exchange rates, making carry trades less attractive.
Since the end of 2021, the return on yen carry trades has reached 45%, compared to a 32% return on the S&P 500 index. Undoubtedly, this enticing return has attracted more and more investors, with short positions on the yen reaching $21.6 billion by the end of July.
However, after the Bank of Japan raised interest rates in July, investors rapidly withdrew from yen carry trades, leading to a global stock market evaporation of about $6.4 trillion within three weeks, with the Nikkei 225 index experiencing its largest drop since 1987
