Yen's Surge Fails to Disrupt Carry Trade

The yen's recent surge should have toppled the carry trade, but it barely budged. This strategy involves borrowing money in a currency with low interest rates and investing it somewhere that pays more.

Japan's policy rate is just 1%, making the yen a favorite among borrowers. Last week, the yen touched its weakest point since 1986 at around 164 per dollar before U.S. and Japanese officials intervened to stem its decline.

The Bloomberg gauge of emerging-market carry returns dropped about 1% following the intervention, roughly matching a G-10 currency benchmark. In contrast, a similar rally in August 2024 forced traders to close out yen-funded positions, causing the same gauge to drop by 4%.

Investors have diversified their borrowing currencies, with many now using euros and Swiss francs instead of just yen. The math favors this approach: the euro-area benchmark rate is 2.25%, below the Federal Reserve's target range, making borrowing euros cheap.