BOJ Hike Triggers Yen Carry Trade Unwind, India's Rupee at Risk

The Yen Carry Trade is one of the oldest strategies in global forex.

It involves borrowing in a country with low interest rates and investing in a country with higher returns. Japan was the perfect funding source for over 20 years, keeping its interest rate at zero to fight deflation.

The Japanese Yen became the world's favourite currency to borrow in. A typical trade looked like this: borrow yen at 0.1% in Japan -> sell yen, buy Rupees or Dollars -> invest in high-return assets like Indian equities, Indian government bonds, or US tech stocks.

However, when the Yen strengthens or Japan raises rates, the trade reverses and investors have to sell their Indian assets to buy back the now-expensive Yen to repay the loan. This is called an unwind.