The Yen Carry Trade

For decades, the Bank of Japan held interest rates at or near zero, making the yen one of the cheapest currencies in the world to borrow. Hege funds, investment banks, and institutional traders recognize the opportunity immediately. Borrow yen at close to nothing, converted into higher yielding currencies like the US dollar or Australian dollar, and park that capital in assets paying 4, 5, or 6%. The spread between borrowing cost and investment return was essentially free money, and the trade became one of the most popular and profitable strategies in global finance. At its peak, the yen carry trade involved trillions of dollars in notional value. The mechanics were elegantly simple, but the scale was staggering. Japanese savers deposited money into domestic banks earning almost nothing. Those banks lent cheaply foreign institutions borrowed that cheap yen and deployed it across global markets into US treasuries, emerging market bonds, equities, real estate, and corporate debt. The trade did not just generate returns for the participants. It injected enormous liquidity into markets worldwide, suppressing volatility and compressing credit spreads in ways that benefited borrowers and asset owners across every major economy.