Yen Bashing Intensifies as Carry Trade Pressures Currency

Two weeks after a historic joint US-Japan intervention in the yen, market ructions are rising. The Japanese currency had perked up when US Treasury Secretary Scott Bessent intervened, causing the US dollar to fall from 164 yen to around 156 yen.

The US government's efforts were seen as a success at first, but now investors are selling yen in large amounts again. Data shows that since the intervention, investors have been consistent and sizeable sellers of yen every day. This has taken the exchange rate back up to 159 yen, near where it was before the intervention.

The carry trade is a major factor behind the yen's weakness against the US dollar. Investors borrow in cheap currencies like the yen and invest in higher-yielding assets like US government bonds. The carry trade thrives in low-volatility market environments, which is currently the case.

Analysts are divided on the degree to which the carry trade affects the yen. However, Masayuki Nakajima at Mizuho Bank notes that several quirks in the yen market indicate it is exerting modest pressure on the currency. He also warns that if the unwind of the carry trade were to materialise, its impact would potentially weigh on a broad range of assets.