Yen arbitrage trading not completely resolved! Going long on the yen becomes the "answer to the question"?

Strategists warn that the rapid unwinding of "carry trades" is far from over, and investors should be wary that this process may continue to develop.

Carry trades refer to an operation where investors borrow in low-interest currencies (such as the Japanese yen) and then invest the proceeds in higher-yielding assets elsewhere. In recent years, this foreign exchange strategy has been extremely popular, especially when investors expect the yen to remain cheap and Japanese interest rates to stay low.

However, last week, as the Bank of Japan raised interest rates leading to a stronger yen, carry trades based on the yen began to unwind significantly, triggering a sharp sell-off in global markets.

Richard Kelly, Global Head of Strategy at TD Securities, stated that while some economists believe the unwinding of carry trades may have largely been completed, he is "very hesitant" to declare the end of the unwinding process.

In an interview on Monday, Kelly said, "I think there is still a lot of room for further unwinding, especially when you look at how undervalued the yen is. This will change valuations over the next one to two years. It will have spillover effects."

Economists note that it is difficult to accurately assess the scale of yen carry trades, with estimates varying widely. According to Reuters, some analysts estimate that the total amount of yen carry trades could be as high as $4 trillion based on Japan's overseas investment portfolio data.

However, analysts at TS Lombard stated in a research report last week that investors may need to raise as much as $1.1 trillion to repay the borrowings from yen carry trades.

Kelly said, "If we look at our models, they are somewhat similar to some of the sentiment seen in the market, telling you to re-enter carry trades. You should buy high-yield assets like Mexico and Brazil and start shorting some funding currencies."

He continued, " I think that might be wrong, I think there is a structural change here. The Bank of Japan still needs to tighten policy, the yen is fundamentally undervalued, and the Fed is starting to ease policy - this will change the direction of some interest rate differentials."

"So, I wouldn't re-enter these high-yield emerging market assets. I might consider going long on the yen even in an environment where the dollar is strong. I think that's the right trade, but it's a structural change, not a short-term change in high-frequency data."

Jesper Koll, Senior Advisor at Monex Group, said in an interview on Tuesday, "In fact, I think the massive violent correction we experienced last week was actually healthy because it forces investors to focus on what the real Japanese strategy is."

Koll said, "The real Japanese strategy is not just about quick carry trades, but benefiting from corporate restructuring, now for the first time sustainable wage growth is emerging. Therefore, attention should be on the domestic Japanese economy, not the bubble economy brought about by zero interest rates."