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Yen carry trade is a method of currency carry trade using the Japanese yen. Carry trade is an trading strategy in which an investor borrows (buys) a currency with a low interest rate and lends (sells) a currency with a high interest rate. Applying this method they may make money on the difference between the interest rates.

This form of investment is popular with financial institutions, governments and hedge funds, particularly at times when the the global currency markets are relatively stable and the worldwide stock markets are broadly bullish. In other words, it could be a good investment strategy at times of world economic stability and growth.

The Japanese yen is the currency most often taking part in carry trade. This is because over the past years it has consistently been a main currency with the lowest interest rate. The Bank of Japan, which controls Japanese interest rates, has determined them at a a very low level since the late 1980s. Often this is below 0.5%.

Theoretically you would not assume carry trade to be lucrative because the currency values would adjust to reflect the discrepancy in interest rates and this would balance out the possible returns. However, in practice there is a profit possibility as carry trades have the influence of weakening the borrowed currency. So yen carry trade keeps the yen artificially low.

Of course there is a risk that the tide will turn but due to the level of control exerted by the Bank of Japan, worldwide confidence is generally quite buoyant. On the other hand, in the case of a significant financial crisis in the USA and the other main economic powers the yield of carry trade is bound to fall.

In fact where there is a considerable change in currency rates such that the yen rises in value against the lent currencies, it is possible for the investors to lose money when it comes to reversing the scheme. Since there is a huge amount of funds involved in yen carry trade it can have a significant destabilizing influence on the foreign exchange markets if market players suddenly turn away from this kind of investment.

This effect is known as the unwinding of yen carry trade. It occurs when investors become averse to risk which would probably happen when the yen is going up against the lent currencies. This can have a significant impact on the value of yen currency crosses. As we saw, yen carry trade weakens the yen so the effect of the unwinding will be to strengthen the yen side of the pair even further.

Yen carry trade is for the big players in the international financial markets. It is not something that an independent forex trader would normally expect to get involved in directly. Still, any forex trader involved in a yen pair has to understand yen carry trade and its influence on yen prices. Forex signals could be a helpful trading tool to predict, when the trend turns for yen pairs. There are a lot of forex signal services covering yen pairs online. However, make sure that you trade only reliable forex signals!

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