What is the yen carry trade?

By Deputy editor Tim Bennett Mar 17, 2011

Tim Bennett

Share with
friends:

Comments (5) Print this article

A favourite trade of hedge funds in recent years has been the yen carry trade. Now, in the wake of the disaster in Japan, they are all piling out, sending the yen soaring. But what is a carry trade? Tim Bennett explains.

• Watch all of Tim's video tutorials here

Carry trade

Carry trades seek to make money from the fact that the interest rates set by central banks around the world vary considerably. In Japan, for example, the lending rate has been close to zero for some time and is still only 0.5% today - the lowest for any major currency - whereas in Australia it is 6.5% and in New Zealand 8%. Investors seeking to exploit these differences typically borrow cheaply in Japan to fund investment in assets, such as bonds in the higher yielding currencies hoping to benefit from the large difference in interest rates. This works provided the yen doesn't suddenly strengthen against the other major currencies. The effect would be to create large capital losses especially for investors who borrowed heavily to fund carry trading.

• Entry from MoneyWeek's Financial glossary.

Comments (5)

Published in Video tutorials | More articles by Tim Bennett

Share with
friends:

Related articles

Comments

Leave a comment

  • 1. Graham

    (05 March 2011, 02:03PM)  Complain about this comment

    Thanks Tim, excellent guide as always.

    Having looked at the list of brokers charges eleswhere on the site and realising that savings can be made, how do I go about moving the shares I have (some within an ISA, some not) to another broker, and at what cost?

  • 2. James

    (22 March 2011, 02:22PM)  Complain about this comment

    What a fantastic explanation - I was completely none-plussed by the appreciation of the Yen despite the disaster and the BoJ printing trillions - until I saw this. So why don't the Hedgies just get together and short sell the Yen so it depreciates and they make even more money?

  • 3. Klaus

    (23 March 2011, 10:44PM)  Complain about this comment

    Excellent and competent comment

  • 4. Minnie

    (25 March 2011, 11:13AM)  Complain about this comment

    Very good and clear. I've liked all of your explanations I've read.

  • 5. Jordan

    (28 July 2011, 11:13AM)  Complain about this comment

    Hi Tim can you please explain why the Yen has been increasingly stronger against the USD and Euro over the past decade when the interest rate has been the lowest for any major economy? I understand why it has strengthened in the aftermath of the tsunami although the Yen has been appreciating long before that event. Surely under normal circumstances the carry trade should weaken the Yen as money is being taken away from the economy and invested elsewhere? Thanks Jordan

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


>