Yen Is Back As The Carry-Trade Currency

After Japan’s tsunami disaster, Yen surged on the assumption that Japanese companies and individuals will repatriate their overseas investments back home, causing high demand of Yen, thus warrant a strengthening in the currency. This happened even in the face of Bank of Japan expanding its quantitative easing program to inject trillions of Yen into the banking system. However, the aggressiveness of traders took the idea too far and too fast, causing USD/JPY to trade from ~83 to ~76.4 in five days, and at the request of the Bank of Japan, G7 joined together to intervene, finally staunching the rise of Yen.

We never believed Yen, given that it had already strengthened so much after the financial crisis, could or should strengthen as much as it did last time after the 1995 Kobe quake. This time, with the additional nuclear crisis (which just dumped radioactive water into the ocean), wrecking absolute havoc on Japanese economy, many of its Northeastern agricultural, fishing, and tourism activities will take a long time to recover. Even with a national debt with 200% of its GDP, Japan probably has no choice but to continue or even expands its loose monetary policy.

With Sweet Crude Oil hovering $110/barrel, even though most people still do not expect the bi-winning Fed will tighten anytime soon, as witnessed on the continual weakening of the Dollar against most currencies, USD had strengthened significantly against Yen. As we stated in our last article, USD/JPY needed to push through 83.4 to really staunch the appreciation of Yen, and then push through 84.5 to get traders to cover their ‘long Yen’ bet. While we thought this would take a while to do from the 81 level, it actually took only about 2 weeks to this to happen.

While we will not know if G7 had a hand on this rapid depreciation of Yen from 81 to its current trading level above 85, the recent hawkish chattering from some members of the Fed probably played a large role in this as well. While the bi-winning Fed may not actually do any tightening even when some of its members continue their hawkish chattering, it is probably a safe bet that Japan will be the last to raise interest rates. Yen, once again, has become the carry-trade currency again.

Now that USD/JPY is trading above 85, the next stop is 85.98. If USD/JPY trade past this, we believe traders who previously betted on Yen appreciation not only will cover their positions, but may even reverse their positions and start shorting Yen. In this case, there is a good chance it can trade towards 90, as stated by Eisuke Sakakibara, formerly Japan’s top currency official. For traders who are not afraid of using leverage, this could turn out to be ‘the’ trade of 2011. For investors who trade only equities, one can use the CurrencyShares Japanese Yen Trust for this trade, but remember that this ETN mimics JPY/USD instead of USD/JPY. So to bet on the depreciation of Yen, one will have to short rather than long on FXY.

Daniel Ho is the founder of, a financial portal providing financial information and market statistics for investment professionals.