Yen Intervention Fails to Rekindle Carry Trade as Rate Differentials Bite

HSBC Asset Management reviewed the recent coordinated intervention by Japanese and US authorities to support the Japanese Yen, recalling the sharp carry-trade unwind during the previous episode two years ago.

The report argues that despite near-term support and short positioning risks, persistent US inflation and cautious Bank of Japan tightening leave rate differentials weighing on the currency's medium-term outlook.

Two years ago, global markets were jolted by a surge in the Japanese yen triggered by authorities intervening to support the currency in FX markets, plus a surprise shift in policy rate expectations.

This caused a sharp unwind of the yen 'carry trade', where traders borrow in yen to buy higher-yielding overseas assets, and it sparked widespread volatility.