The ultimate "yen carry-trade" guide

money.jpgStill not sure what carry trade is, how it affects markets and what it has to do with Japan and the Yen? Well, if you have time you should read this recent article from Bloomberg's William Pesek Jr. 

What is it ?

"Over the last decade, the trade -- which exploits the gap between ultra-low Japanese interest rates and higher ones elsewhere -- has become a staple in markets. In many cases, anyone borrowing for next to nothing in yen and parking the funds in, say, higher-yielding U.S. Treasuries or higher-returning Indian stocks found it to be a sure bet.

That's about to change as Japan's recovery leads to higher rates in the world's second-biggest economy."

Bringing volatility to markets ...

"Global markets have been slow to grasp the specter of higher Japanese rates. In recent weeks, though, surprisingly large moves in markets from Iceland to Turkey to India have been partly attributed to the unwinding of yen trades. And where yen- volatility is concerned, we probably haven't seen anything yet.


What makes the yen-carry trade so worrisome -- and easy to dismiss as a potential problem for markets -- is that no one really knows how big it is. It's not like the BOJ has credible intelligence on how many companies, hedge funds or mutual funds borrowed in yen -- or how much -- and put the money into assets elsewhere.

It would be more comforting if the Bank for International Settlements, the International Monetary Fund or the Federal Reserve Bank of New York had a better handle on all this. Who really knows how many purchases of Shanghai properties, Google Inc. shares, Zambian treasury bills, bars of gold or derivatives are related to yen borrowings?"

Moving on to William's conclusion; the export of dearer money ...

"The irony of all this is rich. The world has anxiously awaited Japan's recovery, and its arrival is good news for Asia. Yet there's a catch: As Japan raises its interest rates, it may export higher borrowing costs everywhere else."