📈 Japanese Carry Trade

Is the USD/JPY carry trade back on?

USD/JPY Carry Trade

Japan has long had a policy of negative interest rates. That changed recently as the Bank of Japan has begun raising rates to ward off inflation.

This spooked global markets, as investors use the Japanese Yen as a vehicle for a carry trade.

Essentially what they do is borrow Yen (at very low interest rates) and use that capital to purchase higher yielding assets, such as USD or US equities.

With uncertainty around interest rates in Japan, investors using this method bought back the Yen and sold their USD/US equity positions, causing the massive volatility we experienced last week.

You see this illustrated above where the Yen has been net short for many years, but just recently flipped to net long for the first time in a long time.

However now the Bank of Japan has signaled that they will hold off on raising rates again due to the volatility it caused, bringing the carry trade back.

This is why watching the moves of the Bank of Japan is incredibly important for US equities. I explain this concept in more detail here: