What is the yen carry trade?

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.

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.

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  • Graham

    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?

  • James

    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?

  • Klaus

    Excellent and competent comment

  • Minnie

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

  • Jordan

    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