GlossaryYen Carry Trade Watcher
Yen Carry Trade Watcher
The study shows the rate gap between the US dollar and the yen: the American policy rate on the money market minus the Japanese overnight rate. The yen carry trade draws its return from this difference. If it shrinks or turns negative, the trade loses its basis, and the unwinding of positions often hits risk assets first.
Zones
| Range | Rating | Color |
|---|---|---|
| from 0.10% | Carry pays | green |
| 0 to below 0.10% | Thin lead | amber |
| below 0% | Inverted | red |
The zero line is bold, with a reference line at 0.10%. Below zero, the background is tinted red.
How to read it
In a carry trade, someone borrows yen at the Japanese rate, exchanges them for dollars and invests at the American rate. The interest income before currency effects is roughly the gap times the volume deployed, per year.
- Wide gap: The trade pays off, and capital flows out of the yen into dollar assets and from there often on into risk assets.
- Shrinking gap: If the Fed cuts or Japan hikes, the trade gets thinner. Positions are reduced, and yen have to be bought back to do so.
- Below zero: The yen yields more than the dollar. The trade only pays off through exchange rate gains.
At their core, the zones separate two worlds: a real interest rate lead for the dollar, and phases when both rates were close to zero, as in the years after 2009 and 2020. In the remaining years, the line usually sits well inside the green zone.
Limitations
- Motive, not trigger: The gap tells you how attractive the trade is, not when it will be unwound. Unwinds are often triggered by a quick rise in the yen while the rate difference is still several percentage points. The line gives no warning in such cases.
- Without exchange rate or hedging: The study only counts interest. Costs for currency hedging and moves in USD/JPY are not included.
- Monthly values: Rate decisions between two monthly values only appear with the next monthly average, and only proportionally. Meant for 1D, 4D and 1W.