YEN CARRY TRADE (Syllabus: GS Paper 3 – Economy)

Context: The so-called Yen carry trade has been in focus in the past few trading sessions in the wake of the selloff in shares of US technology giants.

Yen Carry Trade

• About: The Japanese yen is a widely used currency for carry trades.
• Borrowing at Low Rates: Investors, including Japanese retail investors, borrow yen at low interest rates.
• Investing in Higher Return Assets: They use the borrowed funds to purchase assets in other countries with higher returns, such as equities and bonds.
• US Equities Preference: Recently, US equities have been a favored choice due to the strengthening of the dollar.
• Long-term Zero Interest Rate Policy: Japan has maintained a zero-interest rate policy for over two decades, except for a brief period between 2006 and 2008, to combat persistent deflation.

Impact on Indian Equities

• Unclear Flow of Funds: It is unclear how much money has flowed into India from yen carry trades.
• Assumed Participation: It is assumed that some carry trades have involved Indian equities, given their strong performance in recent years.
• Japanese FPIs: As of June 30, Japanese foreign portfolio investors held ₹2.05 lakh crore in Indian equities, while US FPIs held the highest at ₹30 lakh crore.
• Concerns for Indian Companies: A stronger yen could worry Indian companies with yen-denominated debt, especially if they have not hedged against currency movements.

Carry Trade

• About: A carry trade is a hugely popular trading strategy where an investor borrows from a country with low interest rates and a weaker currency and reinvests the money in assets of another country with a higher rate of return. 
• It has been one of the biggest sources of flows in the global currency market.