🇯🇵 THE TRUTH ABOUT CARRY TRADE IN YEN IN THE CURRENT CONTEXT

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🔸 The Bank of Japan hinted this week that it might raise interest rates, rekindling concerns about carry trade in yen.

🔸 The yields on Japanese 10-year government bonds are at their highest level in 18 years, while the yen remains weak. This suggests that carry trade persists. While JP Morgan estimates that more than 50% of carry trade operations in yen were closed last year, some analysts put the figure at around 500 billion dollars of carry trade operations backed by yen still in effect.

🔸 Carry trade in yen is a strategy that involves borrowing yen at low interest rates when Japan maintains low interest rates, and then investing in higher-yielding assets such as U.S. stocks, emerging markets, and cryptocurrencies. When Japanese bonds offer higher interest rates than before, capital is no longer constrained to head abroad in search of yields, as was previously the case.

🔸 It is true that Japanese interest rates remain well below American rates, which significantly reduces the likelihood of a massive liquidation of carry positions. However, the real risk lies in declining demand for American bonds, which forces their yields to remain high to stay competitive, thus exerting downward pressure on interest rates across the market.