Yen-Funded Carry Trade Bounces Back from Intervention
The yen-funded carry trade, which involves borrowing in Japan's low-yielding currency to invest in higher-yielding emerging markets, is showing surprising resilience after a joint US-Japan intervention dented its appeal.
According to the Bloomberg EM FX Carry Risk Premia Index, the strategy has fallen about 1% since Japan used direct action to bolster its currency. This fall is relatively small compared to the 4% drop seen in August 2024 when a sharp yen rally roiled global markets as traders rushed to repay their yen-denominated borrowings.
The carry trade's continued popularity may be attributed to investors' desire for higher returns in emerging markets, which are offering more attractive yields than Japan. This strategy involves borrowing cheaply in the yen and investing in currencies with higher interest rates, such as those found in emerging markets.