Yen Carry Trade Faces Disruption as BOJ Rate Hikes Loom
The yen carry trade has been a dominant force in global markets for years. However, expectations of accelerated rate hikes by the Bank of Japan (BOJ) have begun to undermine this strategy.
The carry trade involves borrowing the yen at a low cost and using it to buy higher-yielding currencies like the U.S. dollar, Mexican peso, or New Zealand dollar. This can result in annualized returns of around 2.5% to 3.5%. However, if the BOJ were to hike rates, this trade would become less profitable.
The size of the yen carry trade is difficult to estimate, but cross-border yen borrowing jumped to a record 360 trillion yen ($2.34 trillion) as of March. Another method to gauge its size is to look at yen short bets, which stood at 92,227 contracts in the week ending September 1.
The current situation differs from the 2024 unwind shock when the BOJ delivered a surprise rate hike, triggering a surge in the yen and forcing carry traders to unwind their positions. This time around, equity markets have taken in stride the monetary tightening signals along with gains in the yen.