With interest rates at 0.5 percent in Japan, the lowest among industrialized nations, analysts say the carry trade is not dead — at least not yet, anyway.
Sluggish growth conditions in Japan, with hints that deflation is still lingering, will likely constrain the Bank of Japan (BOJ) from “normalizing” interest rates anytime soon. As a result, when global investors find a renewed appetite for risk, they’ll likely step back into the carry trade, depressing the yen’s value. However, at the first whiff of volatility, financial market instability, or weakening economic news — especially relative to the U.S. — a massive unwinding would prompt the yen to spike up again.
“Carry trades remain extremely fluid,” says Brian Dolan, chief strategist at Forex.com, a division of Gain Capital. Dolan has noticed an extremely high correlation between U.S. stocks and the dollar/yen pair (USD/JPY).
“If stocks are down, the yen crosses are down,” he says.
Jamie Coleman, managing editor of Thomson FX Hub, agrees.
“Trading in the yen has almost nothing to do with the Japanese economy and everything to do with the carry trade and people’s willingness to take on risk,” he says. “The carry trade has become the risk barometer. When the market feels risk averse, the yen strengthens; when the market is in a risk-taking mood, it shorts yen aggressively.”
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