I got the cards, but not the luck
August 5, 2024 10:23 AM Subscribe
Global Carry Trade Unwind Extends as Peso Drops, Yen Gains
"The closing of short yen positions represents a “real structural issue” with investors realizing they will have to pay a positive interest rate and unwinding the trade as Japan is expected to raise interest rates at least one more time this year"
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What's a carry trade again?
Here’s what sounds like a surefire way to improve an asset’s returns: Use cheaper money to buy it. That’s the core of what’s known as a foreign-currency carry trade. Investors take advantage of a difference in interest rates between two countries to borrow where the rate is low and invest where it’s high. Carry trades are especially popular when central banks in different parts of the world pursue diverging monetary policies, as one country might fight inflation while another seeks to boost growth. But be warned. The trades can also be a good way to lose large sums, given that exchange rates are prone to unpredictable corrections.
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Global markets are reeling, but economists say: Don’t panic yet
“This is not the recession train; it’s just a good old-fashioned market panic,” said Joe Brusuelas, principal and chief economist for RSM US. “This is not a D.C.- inspired event, about a slowing job market or the Fed being behind the curve. It’s about a larger regime change, where investors are adjusting to the end of easy money globally.”
Japan for years has kept interest rates negative, making it attractive to borrow money against the yen to invest in higher-yielding assets such as tech stocks. But the Bank of Japan last week raised interest rates to 0.25 percent and suggested that it would continue doing so, causing the yen’s value to spike against the dollar and sending ripples throughout the global economy.
[ungated]
What's a carry trade again?
Here’s what sounds like a surefire way to improve an asset’s returns: Use cheaper money to buy it. That’s the core of what’s known as a foreign-currency carry trade. Investors take advantage of a difference in interest rates between two countries to borrow where the rate is low and invest where it’s high. Carry trades are especially popular when central banks in different parts of the world pursue diverging monetary policies, as one country might fight inflation while another seeks to boost growth. But be warned. The trades can also be a good way to lose large sums, given that exchange rates are prone to unpredictable corrections.
[ungated]
Global markets are reeling, but economists say: Don’t panic yet
“This is not the recession train; it’s just a good old-fashioned market panic,” said Joe Brusuelas, principal and chief economist for RSM US. “This is not a D.C.- inspired event, about a slowing job market or the Fed being behind the curve. It’s about a larger regime change, where investors are adjusting to the end of easy money globally.”
Japan for years has kept interest rates negative, making it attractive to borrow money against the yen to invest in higher-yielding assets such as tech stocks. But the Bank of Japan last week raised interest rates to 0.25 percent and suggested that it would continue doing so, causing the yen’s value to spike against the dollar and sending ripples throughout the global economy.
[ungated]
having lived in Japan for most of the 1990s I got to live FX the hard way.
https://fred.stlouisfed.org/graph/?g=1rgOw shows how the yen has moved between 80 and 160 since the 1986 Plaza Accord.
https://fred.stlouisfed.org/graph/?g=1rgOM is a couple years out of date, but shows gov't debt to GDP for Japan vs. the US, showing how our paths diverged in the 1990s as they turned to stimulus to bail out the smoking crater of their economy following their Bubble Economy collapse that started in the early 1990s.
(Australia and Canada may be cruising in the same waters now since home unaffordability is similarly off the hook there)
https://fred.stlouisfed.org/series/DDDI06JPA156NWDB is a piece of the Japanese puzzle tho, showing the BOJ has bought much of that gov't debt issue (the Fed's balance sheet is currently at 25% of GDP).
As someone who wants to retire maybe (at least part-time??) in Japan their economy is indeed a puzzle to me. Wealth-wise, they're doing OK, this colossal debt they have they just owe to each other so it's neither here nor there in the big macro (Weimar!/Argentina!) sense.
My general take is that their economy took a long time to adjust from the postwar (WW2*) super-easy-money FX regime of 300 yen to the dollar, so when the yen appreciated to 2X that in the 80s, internal prices didn't change so what was cheap in USD dollar terms (i.e. what Vietnam-era servicepeople in Japan got to see) became rather expensive (e.g. a ¥100 can of coke worked out to $0.80 when I was there, which vs 1990s US prices for vending machines was pretty high) . . . but as non-inflation held there since the 1990s US inflation has made Japanese domestic prices cheap again in USD terms, even more so with the recent FX blip to ¥140+.
Japan is a land of contrasts...
* pre-WW2, the yen was around 2 per dollar.
posted by torokunai at 11:17 AM on August 5 [2 favorites]
https://fred.stlouisfed.org/graph/?g=1rgOw shows how the yen has moved between 80 and 160 since the 1986 Plaza Accord.
https://fred.stlouisfed.org/graph/?g=1rgOM is a couple years out of date, but shows gov't debt to GDP for Japan vs. the US, showing how our paths diverged in the 1990s as they turned to stimulus to bail out the smoking crater of their economy following their Bubble Economy collapse that started in the early 1990s.
(Australia and Canada may be cruising in the same waters now since home unaffordability is similarly off the hook there)
https://fred.stlouisfed.org/series/DDDI06JPA156NWDB is a piece of the Japanese puzzle tho, showing the BOJ has bought much of that gov't debt issue (the Fed's balance sheet is currently at 25% of GDP).
As someone who wants to retire maybe (at least part-time??) in Japan their economy is indeed a puzzle to me. Wealth-wise, they're doing OK, this colossal debt they have they just owe to each other so it's neither here nor there in the big macro (Weimar!/Argentina!) sense.
My general take is that their economy took a long time to adjust from the postwar (WW2*) super-easy-money FX regime of 300 yen to the dollar, so when the yen appreciated to 2X that in the 80s, internal prices didn't change so what was cheap in USD dollar terms (i.e. what Vietnam-era servicepeople in Japan got to see) became rather expensive (e.g. a ¥100 can of coke worked out to $0.80 when I was there, which vs 1990s US prices for vending machines was pretty high) . . . but as non-inflation held there since the 1990s US inflation has made Japanese domestic prices cheap again in USD terms, even more so with the recent FX blip to ¥140+.
Japan is a land of contrasts...
* pre-WW2, the yen was around 2 per dollar.
posted by torokunai at 11:17 AM on August 5 [2 favorites]
De-dollarization rumbling has startup again.
Is that a factor in the Peso-Yen carry trade? Seems to mostly be an idiosyncratic Japanese situation, with BoJ raising rates when everyone else is considering cuts.
posted by pwnguin at 11:24 AM on August 5
Is that a factor in the Peso-Yen carry trade? Seems to mostly be an idiosyncratic Japanese situation, with BoJ raising rates when everyone else is considering cuts.
posted by pwnguin at 11:24 AM on August 5
I don't see it as a Japan only situation - doomscrolling headlines show massive drop in Dow Jones together with a positive thingamajig for the treasury bond yields - this in turn is making other markets jittery
posted by infini at 11:39 AM on August 5
posted by infini at 11:39 AM on August 5
Weak employment figures in the US on Friday, and the ensuing recession fears, were partly to blame. In Japan, share prices have also been under pressure since the central bank raised its benchmark interest rate on Wednesday. The yen has strengthened by more than a tenth against the US dollar in the past month: that has prompted the unwinding of the yen carry trade, where investors borrow in yen to invest in higher yielding assets, also contributing to the sell-off.
posted by infini at 11:48 AM on August 5
posted by infini at 11:48 AM on August 5
Quite a day for the markets, but at this point, it's just that - a day. It's entirely possible that this is the start of something as far as a market downturn, and it's also possible that this is a blip that's going to be forgotten in two months. No one knows yet, so we're just gonna hafta wait and see.
posted by azpenguin at 12:06 PM on August 5 [2 favorites]
posted by azpenguin at 12:06 PM on August 5 [2 favorites]
I know it's incredibly selfish, but I'm planning a trip to Japan this fall and I was really hoping the yen would stay weak until, like, the day after I left.
posted by praemunire at 2:55 PM on August 5 [1 favorite]
posted by praemunire at 2:55 PM on August 5 [1 favorite]
you can move money into a wise.com JPY-denominated account now if you want.
posted by torokunai at 4:01 PM on August 5 [3 favorites]
posted by torokunai at 4:01 PM on August 5 [3 favorites]
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posted by Callisto Prime at 10:53 AM on August 5 [1 favorite]