Yen Intervention Backfires, Carry Traders Exploit Low-Yielding Currency

The recent intervention by the US and Japan to prop up the yen has created an opportunity for investors to sell the currency. The joint action two weeks ago aimed to stabilize the yen, but it appears to have had little effect, with the currency sliding towards 160 per dollar.

The key factor behind this is the significant difference in interest rates between Japan and other countries. Investors can borrow low-yielding yen at a low cost and use the funds to purchase higher-yielding assets, known as the carry trade.

This strategy has allowed investors to profit from the disparity in interest rates, rather than focusing on the actual value of the yen. The result is that the yen continues to decline, approaching its worst week against the dollar since mid-May.