What if the Bank of Japan suddenly raised short-term interest rates, choking off the yen carry trade?
The yen carry trade (borrow at low rates to buy stock) still works.
J's ultra-low 0.25% has fuelled an unhealthy boom in the yen carry trade as investors borrow cheaply in Japan to invest in higher-yielding assets overseas.
Hedge funds and other investors have used the yen carry trade to drive a boom in U.S. credit and equity markets in the last year.
Foreign hedge funds and the like have been unwinding huge positions in the yen carry trade, where they borrowed cheap yen in order to invest in high-yielding currencies.
Another contributor to the end of the yen carry trade is this week's dramatic pull-back in the risk appetite of investors, pushing U.S. Treasury yields lower this week (they did rebound on Friday) and sending shock waves through the global equities markets.
Specifically, a trader who borrowed big in Japanese yen to buy higher-yielding currencies or higher-yielding assets, the so-called yen carry trade.
The carry trade out of Japanese yen for other, higher-interest currencies began to unwind, and the yen gained and the Kiwi dollar came down good.
Even if those of us who believe that the carry trade is responsible for the yen's weakness are wrong, and alternative explanations, such as that of Morgan Stanley's Stephen Jen, are right, the mispriced yen is a very clear sign that something has gone seriously awry with the way global financial markets are working in relation to global imbalances.
In New Zealand, whose currency is a favorite trade of yen carry-traders, the central bank raised rates for the fourth time this year on Thursday, to 8.25, but signaled it was probably done with its tightening.
This so-called "carry trade" tended to push the value of the yen down.
Was the thoroughbred pound in fact a beneficiary of the carry trade, the strategy of borrowing cheaply in Swiss francs or Japanese yen to buy higher-yielding currencies?
ECONOMIST: The pound stumbles as currency speculators cut back on risk
When other world interest rates fell, carry trade investors bought back yen in order to repay their Japanese debts - and those purchases sent the yen higher.
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