Japan's historic yen intervention has ‘turbo-charged’ the carry trade
Japan's historic effort to prop up the yen may have had an unintended consequence: giving investors a better opportunity to put the carry trade back on.
TL;DR
- Japanese investors bought over 5 trillion yen of foreign assets in the two weeks ending Aug. 15, a shift from net selling in the prior period.
- The yen's sharp rally post-intervention provided investors with favorable exchange rates to acquire overseas assets.
- Experts suggest the intervention 'turbo-charged' the carry trade, as borrowing cheaply in Japan and investing abroad remains attractive due to interest rate differentials.
- The yen's strength was short-lived, reverting towards previous levels, reinforcing expectations of continued pressure unless the Bank of Japan raises rates.
- Institutional investors, such as pension funds and asset managers, are continuing to sell yen and rebuild carry trade positions, particularly against higher-yielding currencies.
- Speculative short positions against the yen have decreased following the intervention, but the fundamental incentive for carry trades persists.