Yen Carry Trade Loses Steam as Investors Flock to Swiss Franc

The yen carry trade has been a significant factor in global markets for years, but its impact may be waning as investors shift to other funding vehicles. The strategy involves borrowing the yen at a low cost and investing in higher-yielding assets such as U.S. dollars, Mexican pesos, or New Zealand dollars.

The annualized returns on dollar-yen carry trades are typically around 2.5% to 3.5%, but investors can earn more gains if the yen depreciates during the term. In recent years, however, the trade has garnered lower returns than in the past, with the difference between U.S. and Japanese rates averaging 5% to 6%.

The carry trade was fueled by quantitative easing policies introduced by Prime Minister Shinzo Abe's government in 2013, which coincided with rising rates in the United States and a depreciating yen. The Federal Reserve's rapid rate hikes from 2022 to 2023 further amplified the trade, but its impact may be diminishing as investors switch to other funding vehicles such as the Swiss franc.