Unraveling the Mystery of the Yen Carry Trade: How Much is Left to Unwind?
The recent global stock-market turmoil has been linked to the unwinding of the yen carry trade. But just how big was this trade to begin with, and how much of it is left to unravel?
Market strategists have been grappling with these questions in recent days. According to a top currency-market strategist at JPMorgan Chase & Co., the unwind is only about halfway finished. However, others, like Societe Generale’s Kit Juckes, have pointed out the difficulty in determining the exact size of the trade due to its opaque nature.
A team of economists at TSLombard attempted to quantify the trade, estimating its total size to be as much as $1.1 trillion over the past 18 months. This amount includes all short-term borrowing in Japanese repo and securities-lending markets by foreign investors, as well as foreign securities purchased by Japanese buyers financed with borrowed yen.
Foreign investors engaging in short-term borrowing from Japanese securities dealers likely account for most of the total trade. Despite a recent uptick in the dollar against the yen following dovish comments from a top Japanese central banker, it is expected that a significant portion of the trade still needs to be unwound.
“The dovish rhetoric from the BoJ is a positive development, but the unwind is far from over,” the TSLombard team noted.
In conclusion, the yen carry trade has played a significant role in recent market volatility, with its unwinding potentially impacting global financial markets. Investors should keep a close eye on developments in this area as they navigate their investment strategies.