Market 08/05: Yen Carry Trade Collapse and Global Margin Call

The Collapse of Yen Carry Trade

What is Yen Carry Trade?

Over the past 20 years, as Japan maintained extremely low interest rate policies, investors borrowed Yen at low rates of ~0.4% and converted Yen to USD or AUD to invest in other markets with higher interest rates.

In theory, this means investors are shorting the Yen by borrowing Yen, converting it to other products, and promising to pay back the Yen in the future.

Initially, the investment products were bonds from high-interest and safe countries like the US, but from the end of 2023, Japan gradually abandoned negative interest rates, causing the value and borrowing rates of Yen to rise, forcing investors to use Yen Carry Trade in riskier investments like tech stocks. As time passed and this trade generated profits, investors tried to increase leverage higher and short more to push down the value of the Yen.

On 07/31 just passed, as expected, Viet Hustler reported on 07/29, BoJ raised interest rates by 0.25% and began pushing the Yen exchange rate in the opposite direction, forcing Yen Carry Trade investors to cover shorts by selling investment products in the opposite direction. Not only that, bad economic data from the US increased prospects of FED rate cuts and pushed the USD value down against JPY.

According to estimates, the entire Yen Carry Trade market is worth over 4 trillion dollars. However, this is just an estimate, and the biggest risk of Yen Carry Trade lies in its special “uncertainty” nature:

• Unknown exact size of Yen Carry Trade across all international markets

• Unknown investments funded by Yen Carry Trade

• Unknown which organizations have the largest risk and how much

• Unknown timing and locations where covering is forced

Viet Hustler has had many articles since 2023 warning about this risk:

09/24/2023: Yen Carry Trade activity will gradually be replaced by Yuan Carry Trade

01/01/2024: Bank of Japan (BOJ) may make major changes to interest rate policy in 2024

04/29/2024: The dilemma of Yen Carry Trade traders in the current financial market

Linh Hà's extremely detailed macroeconomics article: