Yen Carry Trade Not Over Yet

The yen-carry trade received a lot of attention a few months back as the BoJ ended its quantitative easing policy and just last month raised its short-term target interest rate for the first time in six years. The draining of capital liquidity is at least partially being blamed for a global equity sell-off in May in conjunction with a Fed rate hike. Nevertheless, the BoJ has said it will "gradually" raise rates with no intention of doing so "consecutively," which has brought the yen carry trade back into fashion.

Chris Young of the IHT wrote about the situation in Japan where still very low interest rates and wide interest rate gaps with other major economies is resulting in weakness in the yen.

So far in August (as of last Friday) the yen has weakened as follows against these currencies:

$NZ -5.0%

$CAN -3.2%

£ -3.2%

R$ -3.2%

Mex$ -2.3%

$US -2.2%

€ -2.1%

In terms of rate spreads, Japan's 0.25% rate is considerably lower than:

ECB 3.0%

Canada 4.25%

US 5.25%

Mexico 7.0%

Brazil 14.75%

For the investor in Japanese equities a weaker yen brings mixed results since it results in underperformance of ADRs, ETFs, and mutual funds versus ordinary shares, but at the same time it actually helps ordinary shares because of investor sentiment and eventually if/when firms repatriate profits (and report foreign exchange profits in earnings releases). Long investors will eventually benefit when the BoJ resumes its rate hikes and central banks around the world slow or end theirs'.