Since everyone is talking about it, let’s explain how it’s impacting stock markets worldwide. 🧵

Hedging against this trade

What is the yen carry trade?

Let's go back over 30 years. In the late 1980s, Japan had a huge boom in real estate and stock markets. The Bank of Japan (BOJ) popped this bubble by raising interest rates.

After the crash, the BOJ cut interest rates to almost 0%. This meant saving money in Japan didn’t earn much. So, people looked for better returns outside Japan.

Some housewives, called Mrs. Watanabes, started borrowing money in yen at low rates, converting it to foreign currencies, and investing it in places with higher returns. At their peak, they were a big part of the Tokyo forex market.

This strategy was called the yen carry trade. Big financial institutions soon adopted it. A lot of money came to America during the dotcom boom through the yen carry trade.

The yen carry trade has worked for the last 30 years because Japan’s rates stayed very low.

How It Works:

Mrs. Watanabe has two choices to make money:

Safe Choice:

• Borrow yen at low interest rates.
• Convert it to US dollars.
• Invest in US bonds, earning higher interest rates.
• Make money from the interest rate difference (arbitrage) and the yen losing value (currency exchange gain).

Risky Choice:

• Instead of bonds, invest in US stocks like SPY (S&P 500 ETF).
• SPY has seen about a 77% return from 2020 to now.
• This can make more money but is riskier.

Example: