How the Yen currency appreciation affect carry trade
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The "yen carry trade" refers to an investment strategy where investors borrow yen at low interest rates and invest in higher-yielding foreign assets. Japan’s historically low interest rates made the yen attractive for this strategy, as borrowing in yen was cheap. Investors would use the borrowed funds to buy assets in countries with higher interest rates, pocketing the difference in yield.
However, in August 2024, the Bank of Japan unexpectedly raised interest rates, making borrowing in yen more expensive. This prompted many investors to unwind their carry trades. They began selling off their foreign investments to repay their yen-denominated loans, which led to a sharp increase in demand for the yen. This surge in yen demand caused the currency to strengthen rapidly, further pressuring Japan’s export-driven economy and exacerbating the stock market’s decline.
The unwinding of these carry trades contributed to significant volatility in the forex markets, as large volumes of foreign assets were sold off, leading to declines not just in Japan but in other major markets as well
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