The deputy governor of the Bank of Japan made unexpectedly dovish remarks on Wednesday, saying that interest rates would not be raised during a period of market instability. This statement directly led to a cliff-like drop in the yen exchange rate, with the dollar rising by more than 2.5% against the yen at one point, setting a recent low for the yen. At the same time, global stock markets were also boosted by dovish remarks and the depreciation of the yen. The Nikkei 225 index rose sharply, recovering the losses on Monday.
In March this year, the Bank of Japan raised interest rates for the first time in 17 years, ending its ultra-loose policy. Since July 31, the Bank of Japan's interest rate hike has triggered a sharp appreciation of the yen, prompting a large-scale liquidation of yen financing carry trades, which has had a significant impact on global markets and led to the emergence of 'Black Monday'.
How big is the yen carry trade?
The yen carry trade and the collapse of U.S. tech stocks have coincided, and the market believes the two trades are linked. After all, the yen’s 11% rise since the beginning of July has coincided with the Nasdaq 100’s biggest correction of 13%.
Since currency trading is not tracked centrally on exchanges like stock trading, it is used by almost all cross-asset market participants, from hedge funds and family offices to private equity and Japanese companies. The exact size of this strategy is currently unknown, and there are many ways to evaluate the market. A rough estimate is that it may reach hundreds of billions or trillions.
For example, according to data from the Bank for International Settlements (BIS), as of March, Japanese banks had lent about $1 trillion in yen to foreign borrowers, up 21% from 2021. A large part of the growth in cross-border yen lending is in the interbank market, in addition to lending to non-bank financial institutions such as asset management companies. In addition, some market views believe that the Japanese government is actually the largest yen carry trader in the market, with a yen carry trade of $20 trillion, but this figure includes the total value of the Japanese government's balance sheet and is suspected of exaggeration.
Although exact figures are difficult to pin down, the scale of the yen carry trade is undoubtedly large and has a significant impact on global financial markets.
Has the yen carry liquidation ended?
Recent market turmoil has demonstrated the widespread influence of the yen carry trade. Different financial institutions have different views on the future of the yen carry trade.
JPMorgan Chase believes that only about 50% of the current carry trade has been closed, warning that short-term volatility has not really ended, but the current speed is a little slower than before. They emphasize that the yen, as one of the most undervalued currencies, still has a lot of room for appreciation in the future.
UBS takes a more pessimistic view, believing that the unwinding of carry trades has just begun and the yen may continue to strengthen in the future. They expect the exchange rate of the US dollar against the yen to fall further and believe that the Bank of Japan may continue to gradually raise interest rates.
Goldman Sachs' analysis is more optimistic, believing that the pressure to close positions in yen carry trades has been basically lifted. They pointed out that the market has digested most of the pressure to close positions, and future volatility may be reduced. In addition, Goldman Sachs believes that the Nikkei index is attractive at its current level and the market may be close to bottoming out.
The recent collapse of the Japanese stock market is largely the direct result of the large-scale unwinding of short-term yen carry trades, rather than a fundamental deterioration in the U.S. economic outlook. As the Bank of Japan sends dovish signals, it brings positive signals to the market. It is necessary to pay close attention to the changes in the Nikkei index and the yen exchange rate. These indicators not only reflect the delicate balance of global financial markets, but also provide investors with potential trading opportunities.
As a leading global financial asset trading platform, 4E supports more than 20 foreign exchange trading pairs including Japanese Yen, US Dollar, Euro, British Pound, Australian Dollar, New Zealand Dollar, Canadian Dollar, Swiss Franc, etc., providing investors with a wealth of trading options. More importantly, 4E provides long and short two-way trading services with up to 1,000 times leverage, allowing investors to respond to market changes more flexibly and maximize returns.
In addition, 4E also provides high-profile index trading opportunities such as Japan225, NDAQ100, SPX500, US30, Germany40, UK100, France40, etc. These indexes not only reflect the market performance of major economies in the world, but also are important tools for investors to conduct asset allocation and risk management. Through the 4E platform, investors can easily participate in the trading of global assets and grasp the pulse of the global market.
