The Yen Carry Trade

You may have only noticed this if you work in Japan, but the yen-to-dollar exchange rate has changed drastically in the last year. When I first arrived in Japan, 16 months ago, it would take about 120 yen to get 1 US dollar. Today it only takes 93 yen to get 1 dollar. I am paid in yen and my salary hasn’t changed, which means I’ve received a handsome raise without a promotion. If I sent home 10,000 yen in August of 2007, it would get me $84. Now 10,000 yen is worth $107. That’s a 28% difference.

I hadn’t thought much about why the yen was gaining so quickly on the dollar (after all, both economies are tanking, so why the disparity?) until I received a Wall Street Journal article last month from my friend, Gordon. It detailed the yen carry trade, which is something I’ve done a bit more research on. This is how it works:

Japan’s government offers super-low interest rates, like 0-.5%. So a lot of big-time investors borrow (sell) tons of yen, then exchange and invest it into a country that pays higher rates. Often this happens with countries known as the BRIC (Brazil, Russia, India, and China) because they are growing fast and in need of investment money, thus they pay high interest rates. But some investors simply invest the money in U.S. treasury bills, which usually offer a rate in the 3-5% range.

But the economies of many countries are suddenly troubled, which means the big investors are getting really nervous. They’re now ‘unwinding their positions’ in both the invested country and Japan. They’re divesting their money in growing nations because it’s no longer safe, then they’re buying back yen to cover their loans. So a lot of people are buying a lot of yen. Yen is in demand. And it’s getting more expensive for outsiders.

And to that I say, "Keep it up!"