Yen Intervention Fails to Curb Carry Trade as Traders Seek Cheaper Entry

Japan's intervention to prop up its currency has inadvertently handed carry traders a cheaper entry point rather than shutting down the trade. Between August 1 and 15, Japanese investors net bought more than 5 trillion yen of foreign assets while the yen was at favorable levels. This move followed last month's joint US-Japan intervention, which saw the yen rise from around 164 to about 155 per US dollar before retreating.

Jesper Koll, an expert director at Monex Group, noted that the intervention 'turbo-charged' the carry trade and will continue as long as Japanese borrowing costs remain below returns in other major economies. This has led to a surge in purchases of higher-yielding assets, particularly US bills and bonds.

Francis Tan from Indosuez Wealth Management pointed out that Japan's low borrowing costs and wide rate differentials with other major economies mean the intervention only addressed a 'symptom' rather than the underlying issue. Meanwhile, State Street Investment Management's Masahiko Loo noted that pension funds and asset managers have continued to sell yen against higher-yielding G10 currencies.