Yen Carry Trade on Brink of Collapse: Analysts Warn of Global Financial Crisis
Pressure is building up in the yen carry trade, which has been a major driver of global financial markets for nearly three decades. The US and Japan intervened jointly at the end of July to halt the decline in the value of the Japanese yen against the US dollar. However, this attempt largely failed when the yen started falling again after an initial bounce.
US Treasury Secretary Scott Bessent warned that 'disorderly yen markets can trigger forced unwinds, which could destabilise global markets.' He feared that Japan would be forced to sell dollars to defend the yen, leading to a decline in the value of US long bonds and a rise in their yield.
The yen carry trade involves hedge funds and other investors taking out loans in Japanese currency at low interest rates to make bets in markets around the world, particularly in the US. This trade has played a significant role in the US Treasury market and has recently provided finance for the AI boom.
However, if either low interest rates in Japan or a low value of the yen begins to rise, then the value of dollar assets of investors falls in relation to the yen in which their loans have been taken out. This can lead to margin calls from lenders and a sell-off of dollar assets to meet them.
The Financial Times has warned that the risks of the carry trade are significant, citing comments by Masayuki Nakajima, a senior strategist at Mizuho Bank. He characterised the yen carry trade as 'one of the main potential sources of market instability.'