Monday, July 30, 2007

Watch out for Yen! - Part 4

When Mr. Junichiro Koizumi took office as the PM of Japan on April 26 2001, he vowed to aggressively push for economic reform. Among other measures taken progressively, he heeded the advice of a top-notch economist from the United States to massively print Yen to lift up the economy.

With the rate of interest at zero, Japan had the world's loosest monetary policy. In sum, Japan's funds were the cheapest in the world - and now, with the enormous Yen printed, the market was flooded with liquidity.

This created a golden opportunity for speculative traders (hedge funds, for example) to borrow cheap Yen for trading in higher-yielding (and riskier) assets, especially those in emerging markets.

This is what we call "carry trades"- which are essentially trades taking advantage of yield differentials (low-yielding Yen anf higher-yielding stocks in China, for example).

This sort of trade yields positive returns, and has since been flourishing, pushing Yen to an even lower rate of exchange.

Yen is reputedly the most undervalued currency in the world - and " carry trades " could be one of the main causes of it.

Yen "carry trades" have been one of the chief factors driving up the Asian stock markets. What implications, then, do Yen movements have on the emerging markets?

8 comments:

traveller said...

Very interesting analysis. Who do you think are doing this kind of carry trade? Are they the Japanese people?

Tony Hii said...

Demands for carry trades come from speculative funds ( or hedge funds), risk-taking investors and Japanese investors who wish to invest in higher-yielding assets overseas by taking up cheap Yen-denominated loans. Carry trades now amount to such a huge sum that it has become a cause for concern.
Please watch out for Part 5. Traveller, I hope I have answered your questions. Tony Hii

traveller said...

Tony, thanks for your explanation.

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