Source- This post on Yen Carry Trade has been created based on the article “What is Yen carry trade and why did it help trigger a global stock market fall?” published in “Indian Express” on 8 August 2024.
Why in News?
Recently, major global stock markets witnessed their steepest decline in decades, with the yen carry trade being a contributing factor to this downturn.
About Yen Carry Trade
| Aspects | Description |
| About | The yen carry trade involves borrowing money in Japan, where interest rates are low, and investing that money in other countries with higher interest rates to earn better returns. |
| Mechanism | Investors borrow in yen due to Japan’s low or negative interest rates. They convert the yen into other currencies and invest in countries with higher interest rates like Brazil, Mexico, India, or the US. |
Note: The yen is the official currency of Japan.
Japan’s Interest Rates Policy
The Bank of Japan (BoJ) kept interest rates at zero percent between 2011 and 2016. Since 2016, rates were pushed below zero (-0.10%) to stimulate economic activity. Lower interest rates in Japan made yen a cheap borrowing currency for global investors.
However, Between mid-March and July-end 2024, the BoJ raised interest rates by 35 basis points to 0.25%. This marked a significant change in Japan’s monetary policy, affecting global carry trades.
Impact of interest rate hike on Global Markets
The BoJ’s interest rate hike has led to the strengthening of the yen against the dollar and other emerging market currencies. Higher yen value made foreign assets, held by investors using borrowed yen, less valuable when converted back to yen.
Market Reaction
Investors began selling off assets in international markets, which were previously bought using cheap yen. This sell-off led to a decline in major stock markets across the world on August 5, 2024. Concerns about further interest rate increases by the BoJ has exacerbated market jitters.
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