The Wall Street Journal reports that the yen hit a three-month high against the dollar today. Combined with the yen’s rise against other currencies and volatility in global markets, investors rushed to unwind yen carry trades.
Many market oracles contend that the fine difference between a boom and its busting rests on movements in the yen carry trade. The yen carry trade is borrowing in countries with low short-term rates like Japan and investing in higher yield assets in nations with higher rates, like the US. As long as exchange rates stay constant, you net the difference in interest rates. Compounded by leverage, you net considerably more.
When the yen rises sharply against the dollar (check), and US Treasuries dip (check), huge losses can result from carry trades (in 1998, this was a major reason for the LTCM collapse). Carry trades are major source of cheap funding and global liquidity, and a sudden unwinding in the carry trade creates a feedback loop that augments existing credit concerns and often results in negative movements in equity markets.
Stocks Plummet on Credit Worries [Wall Street Journal]
Yen Gains as Carry Trades Unwind [Wall Street Journal]
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I’d bet dollars to donuts that Mrs. Watanabe wakes up in a few hours, finds that AUD and NZD went on sale overnight, and sells some more yen.
wow with every credit market melting under their own weight we are still concerned about the yen carry trade? you should be looking at the credit basis trade falling apart
keith, its called a “carry trade” not a “yen carry trade”
if it were the other way around in rates, ppl could borrow in the US and lend in JP.. there by being a Dollar Carry trade
just a minor terminology
These press people are a bunch of idiots. Credit worries …high energy prices…BULLSHI*
It is called summer vacation idiots…and it starts in August.
it is called a yen carry trade. or do you think there is only one kind of carry trade? there are carry trades in numerous assetsyen, mbs, even high grade debt carry trades available so Anon 4:30 you will see that a carry trade is available whenver and wherever there exists an arbitrage opportunity in rates
I belive the YEN carry trade is the main reaason for the global boom.
Luckily Japan cares about profiting from selling Lexus’ and PLaystration 3s.
They are happy with the weak Yen.
7:28
“The yen carry trade is borrowing in countries with low short-term rates ”
that implies that all carry trades are called yen carry trades
borrowing in countries with low short-term rates like Japan and investing in higher yield assets in nations with higher rates…you net the difference in interest rates. Compounded by leverage, you net considerably more.
Compounded by leverage? You realize that borrowing and investing the proceeds (with no added equity) is as levered as you can get? You can’t compound beyond that!