Yen intervention turbo-charges carry trade as investors buy 5 trillion yen

Japan's historic yen intervention gave investors a cheaper entry point to double down on carry trades, with Japanese investors net buying more than 5 trillion yen of overseas assets in two weeks.

"Intervention has turbo-charged the carry trade for fundamental and long-term investors," said Jesper Koll, expert director at Monex Group. "As long as the cost of money in Japan is lower than the return overseas, carry trades will re-assert."

The yen strengthened from around 164 per dollar before the intervention to roughly 155, but quickly surrendered a large chunk of those gains, weakening back toward 159 against the greenback. The U.S.-Japan 10-year yield spread stood at roughly 1.8 percentage points as of Thursday.

The short-lived gains reinforce expectations that the yen will remain under pressure unless the Bank of Japan raises rates enough to materially narrow the bond yield gap with the U.S. — a dynamic that keeps the carry trade's underlying incentive intact.

Ministry of Finance data show Japanese investors net bought more than 5 trillion yen of foreign equities and long-term bonds over the two weeks ended Aug. 15, compared with net selling of more than 300 billion yen in the prior two weeks. The purchases suggest investors used the yen's sharp rally following last month's joint U.S.-Japan currency intervention to snap up overseas assets at more favorable exchange rates.

Rate Differentials Keep the Trade Alive

The intervention did little to change the incentive for investors to borrow or raise funds cheaply in Japan and put the money into higher-yielding assets abroad. Koll said Japanese retail and institutional investors have used the stronger yen to establish new positions in non-yen assets, particularly higher-yielding U.S. bills and bonds.

"The market is far less one-sided than before the intervention, but the incentives to fund in yen remain attractive while U.S.-Japan rate differentials stay wide," said Masahiko Loo, fixed income strategist at State Street Global Advisors.

Long-term investors are continuing to sell low-yielding yen against higher-yielding G10 currencies, consistent with investors using the Japanese currency to fund positions elsewhere, Loo said. Alpha Binwani Capital's founder Ashwin Binwani said institutional investors remained positioned in carry trades against a basket of G10 currencies, led by the Australian dollar.

Intervention Fades, Bearish Bets Rebuild

There are also signs that some currency traders are rebuilding bearish bets on the yen as the impact of the intervention fades. Binwani exited long dollar-yen positions after the U.S.-backed intervention before re-establishing them just above 157, expecting the yen to weaken. "Upon news of the U.S. intervention, we took profit and once again re-established dollar-yen long positions just slightly above 157," he said.

Each intervention-driven rally could offer investors a better entry point to sell the currency, Binwani said. While distinct from borrowing yen to invest directly in higher-yielding assets, the trade is underpinned by the same fundamental force: Japan's relatively low interest rates that keep its currency under pressure.

Overall, speculative positions against the yen have declined. CFTC data show leveraged funds slashed net short yen positions from almost 138,000 contracts at the end of June to 59,526 as of Aug. 11, as authorities demonstrated their willingness to intervene.

The intervention addressed a symptom rather than the structural forces driving the yen lower, said Francis Tan, Asia chief strategist at Indosuez Wealth Management. With the U.S.-Japan yield gap still near 1.8 percentage points and the Bank of Japan's next policy decision pending, the carry trade's economics remain intact — meaning each bout of yen strength is likely to be met with fresh outflows rather than repatriation.

This article is for informational purposes only and does not constitute investment advice.