Rising interest rates in Japan will do little to rescue the beleaguered yen as long as there¡¯s demand for one of the most lucrative bets in foreign exchange, traders say.
The yen remains one of the hottest macro assets to sell as part of so-called carry trades ¡ª a strategy that involves borrowing Japan¡¯s currency for almost nothing, to buy dollars and earn more than 5%. The weakening yen and strengthening greenback are increasing the attractiveness of the carry trade, by boosting its total return over the last year to 18%.
That¡¯s setting up a potentially tense showdown with Japanese authorities who appear bent on stymieing the yen¡¯s seemingly excessive weakness. The Bank of Japan¡¯s next policy meeting may be just over two weeks away, but some market participants are already warning the yen is at risk of falling back to around a 34-year low of ?160.17 as long as these carry strategies remain in vogue.
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