The plight of the carry trade and the Japanese Yen money
June 28, 2008 4:14 am BusinessThe recent rate decision by the Bank of Japan means that the carry trade is alive and well. There is literally trillions of dollars that depend on the Japanese Yen money. The low interest rate offered by the Japanese allows investors to borrow and invest in higher yielding assets. When leverage is applied this can be an attractive proposition. It works very well in low volatility environments because if you add 5 or ten times the leverage to the interest rate differential the returns become significant. In recent times, the carry trade has encountered a more difficult environment due to the fact that the volatility has increased in the equity markets which translates to volatility in the foreign exchange markets.