Yen carry trade is a way of foreign exchange 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. In this way they can earn money on the difference between the interest rates.

This kind of trading is popular with financial institutions, governments and other large lending institutions, especially at times when the the worldwide currency markets are relatively stable and the international financial 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 frequently involved in carry trade. This is because over the past years it has continuously been a major currency with the lowest interest rate. The Bank of Japan, which controls Japanese interest rates, has established them at a an extremely low level since the late 1980s. Often this is below 0.5%.

Theoretically you would not expect carry trade to be profitable as the currency values would change to reflect the discrepancy in interest rates and this would compensate the possible returns. However, in practice there is a profit potential because carry trades have the impact of weakening the borrowed currency. So yen carry trade keeps the yen artificially low.

Needless to say there is a risk that the tide will turn but due to the level of control exerted by the Bank of Japan, global confidence is generally quite buoyant. However, in the case of a major financial crisis in the USA and the other main economic powers the yield of carry trade is bound to fall.

Certainly where there is a big change in currency rates such that the yen surges in value against the lent currencies, it is possible for the investors to lose money when it comes to reversing the position. Since there is a huge amount of money invested in yen carry trade it can have a powerful destabilizing effect on the currency markets if market participants abruptly turn away from this type of investment.

This effect is known as the unwinding of yen carry trade. It happens when investors become averse to risk which is likely to happen when the yen is moving up against the lent currencies. This can have a significant influence on the quotes 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 money markets. It is not something that a home based currency trader would usually expect to get involved in directly. Still, any currency trader involved in a yen pair has to understand yen carry trade and its effect on yen prices. Forex signals could be a useful trading tool to foretell, when the tide turns for yen pairs. There are a lot of forex signal services covering yen crosses online. However, make sure that you trade only reliable forex signals!

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