Yen Rally Disrupts $2.35 Trillion Carry Trade as BOJ Rate Decision Looms
By Aboki Forex —
The Japanese yen's sharp rally is shaking the $2.35 trillion yen carry trade, just as the Bank of Japan is expected to raise interest rates next week. Investors are now reconsidering their positions in one of the world's most heavily traded currencies.
Yen Rebounds From 40-Year Lows
The yen's recovery is driven by expectations of faster BOJ monetary tightening, early signs of capital repatriation into Japan, U.S. pressure and investors unwinding large short-yen positions.
The currency had fallen to 40-year lows in July, prompting a joint U.S.-Japan intervention. On Tuesday, the yen strengthened to 152.89 per dollar, its strongest level since February. Less than a week earlier, it had been trading around 160 per dollar.
Carry Trade Comes Under Pressure
The rapid appreciation threatens the popular yen carry trade. Under this strategy, investors borrow yen at relatively low interest rates and use the proceeds to purchase currencies or assets offering higher returns.
With the BOJ expected to act, further yen strength could force more investors to unwind carry trades. That would raise the cost of these positions and add to volatility in global currency and asset markets.