Ultra-low rates turned the yen into easy cash for bankers. But the carry trade now binds global markets to decisions in Tokyo
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n 2015, Clyde Prestowitz’s book Japan Restored imagined a Japanese century emerging from upheavals such as an Israeli attack on Iran. While conflict now grips the Middle East, there are few indications of the revolutionary change the former US national security official foresaw. But in one crucial respect this already is a Japanese century – thanks to the yen’s role as easy money for global finance.
The Bank of Japan’s loose monetary policy has turned the yen into the world’s cheapest and most reliable funding currency. By suppressing yields on public debt to keep Japan’s domestic economy afloat, the BoJ effectively created a publicly subsidised funding pipeline for bankers. They can make a quick buck by borrowing cheaply in yen and investing in higher-return assets, such as US equities. The “yen carry trade” surged after the pandemic, with speculators betting $435bn in the two years to 2024 out of the estimated $1.7tn worth of yen supplied. The profits for global investors are reckoned to run into tens of billions of dollars.
Japan’s first rate hike since 2007 came in March 2024 – but even that shift barely dented the carry trade’s popularity. There is a persistent fear that the BoJ may decide to catch the market unaware and aggressively raise rates. That would risk a global financial shock for two reasons. First, the profit made from the “spread” between Japanese and US assets would shrink. Second, a stronger yen would mean borrowers need more dollars to repay yen-denominated debts. Add to this that hedge funds involved are heavily leveraged, and it is little wonder that even a hint of policy change unsettles markets.
