The carry trade unwinds and it’s not pretty

Just as Japan is starting to unwind its carry trade, a new one might be forming in the form of 1% base rates in the United States. The carry trade was very popular amongst Japanese retail investors, especially using leverage (see article – hat tip Yves Smith). But, this trade unwound in a vicious way these past few months (see links here and here).

Now, a new carry trade is forming to take its place (at least for the moment). I am NOT bullish on the dollar, but if you can get 18% on Krona investments versus a measly 1% in USD, you might be tempted. Such are the consequences of easy money.

Nevertheless, I digress because this post is about Japan and its carry trade. Below is an article that gives you a feel for what that trade is all about and why its coming undone. Mrs. Watanabe might be advised to stick with domestic savings no matter what the yield.

Mrs Watanabe is crude shorthand for Japan’s $15,000bn pool of savings, the deepest in the world and worth more than the annual economic output of the US. These vast resources are somewhat apocryphally marshalled by Japanese women, who have traditionally held a firm grip on family finances.In fact, Mrs Watanabe is very crude shorthand indeed: she is just as likely to be Mr Watanabe, the manager of a Japanese life assurance company portfolio, or Mr Smith, an American hedge fund manager, borrowing in yen to buy South African rand, U.S. mortgage-backed securities or tea futures. Whoever, she is, she borrowed cheaply in yen, courtesy of Japan’s rock-bottom interest rates – which have been stuck between zero and 0.5 per cent since 1999 – and put the money in higher-yielding assets abroad.

The important thing to know about Mrs Watanabe is that, temporarily at least, she has all but stopped flapping her wings. In the past days, as spectacular moves in global currencies reveal, the carry trade has been violently unwound. With last week’s panic retreat from risk assets of almost every description came a dramatic rise in the yen, partially reversed in the past two days on rumours of a Japanese interest rate cut. Even so, the yen was trading on Wednesday at about Y97 to the dollar, the other “safe haven” currency, against a remarkably steady Y110-Y120 in recent years.

No, if you have your calculator handy, you probably already realized that 97 yen is only 80% of 120 yen. If Mrs. Watanabe was investing in U.S. treasurys, she’s not so happy right about now. And, if it as Australian or New Zealand Dollars, less so. But the interest spreads are pretty intoxicating. Where else is one to put one’s money – Japanese stocks hit a 26-year low recently.

These gyrations do nothing to solve the underlying problem, which is that Asia has an excess of savers and the U.S. and Europe an excess of spenders. Unless that is solved, the world seems condemned to repeat the swings of recent years, as capital is arbitraged between countries where money is cheap to those where it is expensive.Until recently, one of Mrs Watanabe’s favourite wheezes was to take her Japanese yen and put them in Australian dollars, earning her a roughly six-point interest rate gain. This week, she – and those who travel with her – will not have missed the fact that Iceland just raised its interest rate to 18 per cent. That is a 17.5 point differential with Japan, and counting. Krona, anyone?

Related articles

Mrs Watanabe and the sudden rise of the yen


Beware the unwinding of the yen carry trade – FT

  1. John Creighton says

    For fun. Looking at the iceland Carry:

    It’s about a 6% real interest rate. Iceland had some banks collapse recently:

    Also some companies give better dividend yields so is it worth it? But the real question is how do I borrow money cheaper then at a 6% interest rate, and how much would it cost to insure against the risks? Mortgage rates I believe are between 5 and 6 percent and they are backed by assets. What about leveraged ETFs? Is their one that plays the iceland currency against the US dollar? Also for leveraged ETFs does the spread on the interest rate go into the fund?

  2. George says


    This is a wonderful opinion. The things mentioned are unanimous and needs to be appreciated by everyone.


    Virtual Currency

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