The unwinding of the yen carry trade
The primary factor that contributed to the Yen’s rise was the unwinding of the yen carry trade, and that has now come to an end.
A carry trade is a strategy in which an investor borrows money in a country with a low interest rate and uses the money to invest in assets in a country yielding a higher rate. The investor then attempts to capture the difference between the two rates, which can be substantial, depending on the amount of leverage used.
This investment strategy was used extensively between 1998 and 2007 to borrow money in Japan and invest in countries with much higher yields, such as Australia, New Zealand, the BRIC countries, and the United States.
This investment strategy was used extensively between 1998 and 2007 to borrow money in Japan and invest in countries with much higher yields, such as Australia, New Zealand, the BRIC countries, and the United States.
In an attempt to spur economic growth, Japan lowered its interest rates close to zero making it profitable to borrow Japanese yen and invest in resource rich emerging markets, and activities such as subprime lending in the US.