The rapid strengthening of the Japanese Yen is adding to turbulence across global markets. It has fueled speculation about whether this could mark the end of the popular “carry trade”, wherein an investor borrows in a currency with low interest rates, such as the Yen, and reinvests the proceeds in another currency or asset with a higher rate of return.
Well, there is no precise figure for the amount tied up in carry trades, as they are employed by a diverse range of market participants. According to the Bank for International Settlements, cross-border Yen borrowing though not all of it may be related to carry trades has increased by USD742 billion since the end of 2021. ING estimates that outstanding cross-border Yen loans totaled USD1 trillion as of March. My own guess is anything between USD3 trillion and USD4 trillion.
This article from The Japan Times may be of interest:
Here is a section:
At a two-day policy meeting ending Wednesday, the BOJ voted to increase its short-term policy rate target to 0.25% from a range of 0% to 0.1%.
If it was in fact about the Yen, the move worked. The Japanese currency, which had strengthened from the ¥162 level to about ¥152 in the weeks prior to the meeting, rose to the ¥150 level after the rate increase was announced just after noon Wednesday.
On Thursday morning, it made a beeline for ¥148.5 and was trading at about ¥150 to the dollar in the afternoon. Economists believe political pressure may have had something to do with the central bank’s sudden hawkishness.
Prior to the policy meeting, the market sensed a dovishness at the BOJ, with it viewed as not really taking the Yen’s weakness into consideration. Traders and analysts had been expecting the central bank to wait until September or October before raising rates, in order to gain more time to observe the economy, especially consumption and wage growth.
At a news conference after the policy meeting in April, BOJ Gov. Kazuo Ueda said the impact of the weak Yen on underlying inflation was negligible at that point, so there was no need for the central bank to take action.
His nonchalance about the currency may have contributed to the Yen’s rapid move in recent months and it breaking into the ¥160-to-the-dollar range, analysts say.
Ueda and Prime Minister Fumio Kishida met and discussed the foreign exchange rate in early May. Following that meeting, Ueda changed his tune about currency moves, saying they could have a significant impact and that the bank would carefully monitor the situation.
As the Yen weakened further through early July to a 38-year low of nearly ¥162, the central bank encountered fresh political pressure. Some ruling Liberal Democratic Party lawmakers urged the BOJ to raise rates to take the edge off inflation.