The Japanese Yen confirmed a Burial Cross on June 26, 2023. The Yen continues in a technical strong downtrend.
The Yen Carry Trade Is On
The yen carry trade refers to a strategy in which investors borrow Japanese yen at low interest rates and then convert it into a higher-yielding currency to invest in assets with higher returns. The carry trade takes advantage of the interest rate differential between Japan, where interest rates are historically low, and other countries with higher interest rates. In this trade, investors typically borrow yen at low rates, often near zero or negative rates, and then exchange it for a higher-yielding currency, such as the US dollar or Australian dollar. They then invest in assets denominated in that higher-yielding currency, such as bondsUnited States Treasury securities are debt instruments issued by the United States government to finance its spending. Treasury securities come in a variety of forms, including bil... or stocks, in order to earn the interest rate differential. The goal is to profit from the interest rate spread and potential capital appreciation of the invested assets. The yen carry trade became popular in the early 2000s when Japan had near-zero interest rates and other countries had higher rates. However, it carries significant risks, as exchange rate fluctuations can quickly erode any gains. If the yen appreciates against the invested currency, investors may face losses when they need to convert back to yen to repay the borrowed amount. The yen carry trade is often considered a high-risk strategy due to its potential for significant losses if market conditions change or volatility increases. It played a role in the global financial crisis of 2007-2008 when the unwinding of carry trades contributed to market instability.
The run on the Yen is being caused by the Bank of Japan holding onto its Yield Curve Control (YCC) program. Inflation in Japan was around 3.2% year-over-year in May. Meanwhile, the 10-year Japanese Government Bond is paying around 0.38%.
The Yen is being shorted or sold to raise money to invest in the US or European Union. Low interest rates in Japan are providing liquidity to fuel much of the recent bull markets seen in the US and elsewhere. If the Bank of Japan were to raise interest rates, it would cause a margin call to go out around the world and thus cause selling in the US and other markets. It all comes down to how much the Bank of Japan is willing to let the Yen fall. Keep a watch on the Japanese Yen for a potential currency crisis.
