Yen Intervention Turbo-Charges Carry Trade for Japanese Investors
Japan's intervention to prop up the yen has had an unexpected consequence - it may have turbo-charged the carry trade for investors. According to Ministry of Finance data, Japanese investors net bought more than ¥5 trillion in foreign equities and long-term bonds over the two weeks ended August 15. This is a significant increase from the prior two weeks, where they sold more than ¥300 billion in foreign assets.
Market watchers believe that investors took advantage of the yen's sharp rally following the intervention to snap up overseas assets at favorable exchange rates. 'Intervention has turbo-charged the carry trade for fundamental & long term investors,' said Jesper Koll, expert director at Monex Group. The yen strengthened from around ¥164 per dollar before the intervention to roughly ¥155, but quickly lost a large chunk of those gains.
The US-Japan 10-year yield spread stood at approximately 1.8 percentage points as of August 11. This signals that investors are treating bouts of yen strength as opportunities to rebuild carry trade positions rather than abandon them. Long-term investors such as pension funds and asset managers continued selling yen, according to Masahiko Loo, fixed income strategist at State Street Global Advisors.
Francis Tan, Asia chief strategist at Indosuez Wealth Management, described the intervention as only addressing a 'symptom' but not curing the underlying disease of Japan's low borrowing costs and wide interest-rate differentials with other major economies.