Near 160 yen per dollar… ‘Yen carry trade likely to persist’

Yen weakness seen continuing

Boosting carry-trade incentives

As the yen continues to weaken in global FX markets, the “yen carry trade”—borrowing the low-yielding yen to invest in higher-yielding currencies such as the U.S. dollar—is gaining renewed incentive to persist.

On the 16th in Tokyo FX trading, the yen-dollar rate hovered in the 159-yen range per dollar. The yen has recently fallen to its weakest level in 1 year and 8 months. With heightened Middle East tensions and rising crude oil prices, yen weakness and dollar strength are persisting. Nikkei said, “Even at a time when risk-taking is difficult for uncertainty-averse investors, the yen carry trade is maintaining its presence.”

Carry trades financed by borrowing yen—often by global speculative players—are vulnerable to FX losses for some time after execution, as it takes time for interest income to accumulate. As a result, they typically shrink when risk capacity is limited. However, when expectations for a weaker yen spread as they have recently, resistance to increasing short-yen positions tends to ease.

One key pillar of the weaker-yen scenario is the view that the Bank of Japan will prioritize “assessing the situation” and slow the pace of policy-rate hikes. In the past, the BOJ was deeply involved in stabilizing the stock market through purchases of exchange-traded funds (ETFs). Markets are increasingly betting that if the Nikkei index falls further, the BOJ will find it harder to raise rates—fueling expectations that the yen could weaken further.

The U.S. could also be hit by inflation and downturns among trading partners, but its advantage as an oil-producing country remains intact. The dollar is strengthening its edge as the key settlement currency for crude oil. JPMorgan said in a recent report that it “shifted its dollar view from bearish—maintained over the past year—to bullish.”

The U.S. central bank (Fed) and the BOJ will decide policy rates one after another this week. An Asia-based hedge-fund manager told Nikkei, “As the Fed’s relative composure toward the Iran situation and the BOJ’s cautious stance become more distinct, the trend of dollar strength and yen weakness may continue.”

The larger the yen carry trade grows, the greater concerns become over an eventual unwind. According to the U.S. Commodity Futures Trading Commission (CFTC), as of the 10th in the Chicago currency futures market, speculative non-commercial short-yen positions totaled 160,798 contracts—the largest in about three months.

Attention is on when Japan’s government will step in to buy yen. Nikkei projected that “with a break above 160 yen per dollar in sight, wariness over yen-buying intervention will intensify.”

Tokyo = Correspondent Kim Il-gyu black0419@hankyung.com