What is Yen carry trade?

About Yen carry trade:

• It is a trading strategy that involves borrowing at a low interest rate and investing in an asset that provides a higher rate of return.
• It is typically based on borrowing in a low-interest rate currency and converting the borrowed amount into another currency.
• Generally, the proceeds would be deposited in the second currency if it offers a higher interest rate.
• The proceeds also could be deployed into assets such as stocks, commodities, bonds, or real estate that are denominated in the second currency.
• Yen Carry trade
  • The Japanese yen is considered one of the most widely used currencies for this purpose.
  • In yen carry trade, investors, including retail Japanese investors borrow at a low interest rate at home and purchase assets in another country with higher returns, such as overseas equities and bonds.
  • The yen has been popular for carrying trades because Japan has maintained a zero-interest rate policy for over two decades.
  • The idea behind low interest rates is to stimulate economic activity.
  • For instance, such low interest rates incentivise investors to borrow cheaply in yen and invest in other countries (such as Brazil, Mexico, India and even the US) in a bid to earn better returns. Such carry trades are called yen carry trades.