The carry trade is a forex strategy where traders borrow in a currency with low interest rates and invest the proceeds in currencies or assets offering higher returns.
The Yen Carry Trade
Japan has had near-zero interest rates for decades, making JPY the world's most popular funding currency:
- Borrow yen at ~0%
- Convert to AUD, USD, or emerging market currencies
- Invest at 4-5%+
- Pocket the difference
Risks
If the yen suddenly strengthens, carry traders face massive losses. This happened in 2008 and 2024, causing violent yen spikes and stock market crashes across Asia.
Market Impact
Carry trade unwinding causes:
- Yen to spike higher
- Asian stocks to fall (foreign selling)
- Volatility to surge
- Emerging market currencies to weaken