"The Bank of Japan's loose monetary policy has turned the yen into the world's cheapest and most reliable funding currency, creating a publicly subsidised funding pipeline for bankers."
"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."
"Japan's strength is also its weakness, having created an external dependency in the form of the carry trade to manage internal crises rooted in its own success."
"A stronger yen would mean borrowers need more dollars to repay yen-denominated debts, which, combined with heavily leveraged hedge funds, unsettles markets."
The Bank of Japan's loose monetary policy has made the yen the world's cheapest funding currency, facilitating a surge in the yen carry trade. Investors have profited significantly by borrowing in yen and investing in higher-return assets. Despite a recent rate hike, the carry trade remains popular, raising concerns about potential global financial shocks if the BoJ aggressively raises rates. Japan's economic strategy has created an external dependency on the carry trade, reflecting both its strength and vulnerability in managing internal crises.
Read at www.theguardian.com
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