BREAKING: Yen Carry Trade Is Back!

Summary

The video discusses the Yen carry trade and recent developments with Japan's Central Bank (BOJ) abandoning further rate hikes. This decision has significant implications for global markets, especially as the BOJ's previous rate hiking attempts caused the Yen to appreciate, affecting the carry trade. The presenter references insights from a hedge fund expert predicting the Yen's further decline and explores how the BOJ's actions may drive speculators to increase leverage, pushing U.S. assets higher. The conversation highlights broader economic impacts, including potential stock market bubbles due to the carry trade's revival.

Takeaways

• 💥 The Yen carry trade is back in focus after a blowup due to Japan's interest rate policy changes.
• 📉 Japan's Central Bank (BOJ) decided to halt rate hikes, which has caused the Yen to crater, leading to the return of the carry trade.
• 🎯 The market initially believed the BOJ would continue to normalize interest rates, but they've backtracked on this policy.
• 🤔 The carry trade involves borrowing Yen at low interest rates and converting them to dollars to invest in higher-yielding U.S. assets.
• 📈 Market forces often win over central planners' attempts to control currencies, according to a hedge fund manager's insights.
• 📉 Japan's efforts to raise inflation backfired, leading to higher costs of living and public discontent.
• 📉 Real wages in Japan have significantly declined, with inflation outpacing wage growth, further worsening purchasing power.
• 🔄 The BOJ's flip-flop on interest rate hikes led to the strengthening of the Yen temporarily, but the recent decision could push it to 200.
• 📊 The BOJ's inability to raise rates significantly compared to the U.S. has made the Yen carry trade more attractive to speculators.
• 📉 The Yen carry trade is likely to accelerate, potentially inflating U.S. risk assets further, creating a stock market bubble.

Q & A

What is the Yen carry trade, and how does it work?

The Yen carry trade involves borrowing Yen at low interest rates, converting it into another currency, such as the US dollar, and then investing in assets that offer higher returns, like US stocks or treasuries. The profit comes from the difference between the low borrowing costs in Japan and the higher returns from the foreign investments.

Why did the Yen carry trade blow up recently?

The Yen carry trade blew up because the Japanese Yen appreciated against the US dollar due to the Bank of Japan's (BOJ) rate hikes. This increased the burden of debt for those who borrowed Yen, leading to margin calls and forcing investors to sell their assets to cover the rising costs.

How did the BOJ's interest rate policy shift impact the market?

The BOJ shifted its policy by halting further rate hikes, signaling to the market that they were done with normalizing rates. This led to a renewed interest in the Yen carry trade, as investors believed the risk of Yen appreciation had decreased, allowing them to borrow more Yen to invest in higher-yielding assets.

What prediction did the hedge fund manager, Steve, make about the Yen?

Steve predicted that the Japanese Yen would continue to weaken and eventually reach 200 against the US dollar. He argued that central bank interventions to manipulate currency never work long-term, and market forces would eventually prevail.

How did Japan's intervention in the Yen market affect inflation and the government's stability?

Japan's intervention, aimed at controlling the Yen's depreciation, led to inflation, which negatively impacted the standard of living. This sparked public outrage and contributed to the collapse of the Kashida government, as inflation eroded real wages.

Why did the BOJ decide to stop its rate hikes, and what impact does this have on the Yen carry trade?

The BOJ likely stopped its rate hikes because it realized that further increases could harm the economy and fuel inflation. This decision reduces the risk of the Yen appreciating further, encouraging speculators to re-enter the Yen carry trade, driving it into 'hyperdrive.'

What impact does the Yen carry trade have on US risk assets?

As investors borrow Yen to buy US assets, the increased demand can drive up the prices of US stocks and other risk assets. If the Yen carry trade intensifies due to low rates in Japan, it could act as a tailwind for US markets, potentially creating a bubble.

How does the US interest rate policy compare to Japan's, and how does it influence the carry trade?

The US can maintain higher interest rates compared to Japan, as seen historically. This interest rate differential makes borrowing Yen more attractive for investors looking to invest in higher-yielding US assets, fueling the carry trade.

What is the potential downside of the Yen carry trade for investors?

The potential downside is the risk of the Yen strengthening, which would increase the cost of repaying Yen-denominated debt. Additionally, a downturn in US risk assets could lead to margin calls, forcing investors to sell assets at a loss to cover their positions.

What are the next steps for investors in light of the BOJ's policy shift?

Investors should monitor the Yen carry trade closely, particularly its influence on US markets. They should also keep an eye on the BOJ's future statements and any signs of changes in interest rate policy, as these could impact the profitability of the carry trade.

Outlines

00:00

💹 The Yen Carry Trade Blowup

The narrator discusses the recent Yen carry trade blowup caused by the Bank of Japan's (BOJ) interest rate policy. Despite prior rate hikes that strengthened the Yen, the BOJ has now signaled it will no longer pursue further hikes, reviving the carry trade. The narrator recalls a conversation with a seasoned hedge fund manager, Steve, who predicted the Yen would weaken to 200 against the dollar due to the failure of central bank interventions to control currency movements. This foreshadows a return of market forces that could drive the Yen lower.

05:01

📉 Japan's Struggle with Inflation and Yen Devaluation

This section highlights Japan’s attempt to combat deflation over the years by devaluing the Yen. After the Yen hit a 40-year low at 160 against the dollar, Japan's efforts to intervene led to slight improvements, but inflation began to rise, causing public dissatisfaction. This inflationary pressure, though modest at 2%, significantly impacted the standard of living and contributed to political instability, culminating in the collapse of the Kishida government. The narrator contrasts Japan’s inflation woes with the U.S., where past efforts also aimed to raise inflation, showing the unintended consequences of such policies.

10:01

🔄 BOJ Rate Hikes and the Yen Shorts' Annihilation

This paragraph outlines the BOJ’s surprise rate hike in July, which shocked the market and caused the Yen to strengthen, leading to significant losses for those shorting the currency through the Yen carry trade. Traders borrowed Yen at low interest rates, converted it to dollars, and invested in U.S. assets. However, the Yen's appreciation increased their debt burden, forcing asset sales to cover their positions. The narrator emphasizes that these market dynamics, particularly involving riskier assets, magnified the impact on global markets, including stocks in both Japan and the U.S.

15:03

📊 The BOJ’s Reversal and the Risk of Market Bubble

After briefly hiking rates, the BOJ reversed course, ending its rate hike cycle at a mere 25 basis points. This policy shift reduces the risk of further Yen appreciation, leading speculators to believe that the Yen carry trade will escalate dramatically. Traders are expected to increase their leverage, borrowing more Yen to buy U.S. assets without fearing higher rates. The narrator references historical trends where the U.S. raised rates more aggressively than Japan, further encouraging carry trade activity, which could inflate the already risky U.S. asset bubble.

20:03

📈 Speculation and the Future of the Yen Carry Trade

The final paragraph predicts that as the Yen continues to weaken, the Yen carry trade will grow, fueling U.S. risk assets, particularly stocks. The narrator stresses the importance of monitoring the Yen borrowings and how they correlate with the performance of U.S. markets in the coming weeks. The expansion of the carry trade could further contribute to a bubble in U.S. markets, driven by the BOJ's decision to keep rates low. The narrator ends with a call to action, encouraging viewers to stay vigilant and support free-market principles.

Keywords

💡Yen Carry Trade

The Yen carry trade refers to a financial strategy where investors borrow money in yen, taking advantage of Japan’s low interest rates, and invest it in higher-yielding assets like U.S. stocks or treasuries. The video discusses how changes in the Bank of Japan's policies, particularly interest rates, impact this trade, potentially causing large market fluctuations as the trade is unwound or intensified.

💡Bank of Japan (BOJ)

The Bank of Japan is the central bank responsible for implementing monetary policy in Japan. In the video, the BOJ’s decisions on interest rates, specifically its move to end a rate hiking cycle, are seen as major catalysts for the Yen carry trade and the overall financial markets, including the weakening of the yen.

💡Interest Rate Policy

Interest rate policy refers to the actions taken by a central bank to control interest rates. The BOJ’s decision to stop raising rates is central to the video's narrative, as it affects the yen's value and global investment strategies such as the carry trade. The speaker emphasizes the market’s reaction to Japan’s relatively low interest rate levels.

💡Inflation

Inflation is the rise in prices of goods and services over time, eroding purchasing power. The video mentions how Japan's government aimed to spark inflation to avoid deflation, but when inflation finally occurred, it led to public dissatisfaction and impacted living standards. This shift plays a key role in how the BOJ handles monetary policy.

💡Deflationary Debt Trap

A deflationary debt trap occurs when a country's debt becomes more expensive relative to its shrinking economy due to deflation. The video explains how Japan was stuck in this trap, attempting to escape it by devaluing the yen and encouraging inflation, but the resulting policies led to further complications.

💡Real Wages

Real wages refer to the purchasing power of income after adjusting for inflation. In Japan, nominal wages may have increased, but real wages declined due to inflation, meaning people’s ability to afford goods and services worsened. This is a key issue the video addresses when discussing the effects of Japan’s monetary policy.

💡Normalization of Interest Rates

Normalization of interest rates refers to the process of returning interest rates to more typical levels after a period of abnormally low or high rates. The video highlights how the BOJ initially indicated it would normalize rates but later reversed course, signaling to investors that further hikes would not occur.

💡Margin Call

A margin call is a demand from a broker for an investor to deposit additional money to cover potential losses. In the context of the Yen carry trade, when the yen strengthens, investors might face margin calls if their borrowed yen increases in cost, forcing them to sell off assets to cover their positions. This dynamic is a critical risk discussed in the video.

💡Risk Assets

Risk assets are investments like stocks or commodities that carry higher risk but potentially higher returns. In the video, U.S. stocks are frequently mentioned as risk assets that could be affected by the BOJ’s interest rate decisions and the resulting fluctuations in the yen, which drive carry trade strategies.

💡Hedge Fund Managers

Hedge fund managers are professional investors who manage large pools of capital, often engaging in strategies like the carry trade. The video references a conversation with a retired hedge fund manager to illustrate how seasoned investors view the BOJ’s policies and predict the yen's continued devaluation based on historical patterns.

Highlights

The Bank of Japan (BoJ) has ended its rate hiking cycle, causing the Yen to crater and the Yen carry trade to return.

The BoJ's decision to halt further rate hikes reversed the Yen's prior appreciation against the dollar, a key driver of the carry trade unwind.

Historically, interventions by central banks to control currency fluctuations often fail, according to a top hedge fund manager with 40 years of experience.

The hedge fund manager predicts the Yen could weaken to 200 against the dollar, given Japan’s inability to sustain current policies.

The BoJ has intervened multiple times in the open market, attempting to prevent further devaluation of the Yen, which initially sparked inflation but led to economic challenges.

Japan’s real wages have declined significantly, despite nominal wage growth, as inflation has outpaced earnings.

The BoJ’s minimal rate hikes, only up to 25 basis points, have been a key factor in Yen depreciation and the return of the Yen carry trade.

Speculators can now leverage the BoJ's announcement, likely driving the Yen carry trade into hyperdrive with little downside risk.

The Yen carry trade involves borrowing Yen at low interest rates and investing in higher-return assets like U.S. treasuries, stocks, or riskier assets.

When the Yen strengthens or U.S. assets decline in value, it forces carry trade participants to sell U.S. assets to cover rising debt burdens.

The BoJ’s end of rate hikes is expected to reduce the risk of Yen appreciation, making the carry trade even more attractive for global speculators.

In past cycles, Japan has struggled to keep pace with U.S. interest rate increases, further widening the gap and incentivizing the Yen carry trade.

The BoJ’s failure to normalize interest rates, as previously expected, has made it clear to speculators that the central bank is unlikely to raise rates further.

The current environment may push traders to increase their exposure to U.S. assets through the Yen carry trade, leveraging Japan’s ultra-low interest rates.

The Yen carry trade could act as a tailwind for U.S. stock markets, potentially inflating the bubble in risk assets even more.

Transcripts

hello fellow Rebel capitals hope you're

well so everyone remembers the Yen carry

trade blowup from just a few weeks

ago but unfortunately we haven't heard

the last of the Yen carry

trade let's go right over to Zero Hedge

and I'll show you guys what I'm

referring to the Japanese Central Bank

the boj just came out with huge hugee

news about their interest rate policy

moving forward remember they've been in

a rate hiking cycle if you want to call

it that which led to this whole Japanese

Yen blowup because the Yen appreciated

against the dollar and Unwound a lot of

that carry

trade let's get right over to zeroedge

and check out what's going on

now so Yen craters

as Japan gives up on further rate

hikes Cary Trade is back with a bang so

what's going on here is everyone in the

marketplace believed the boj that they

were going to continue to hike rates

they were going to normalize

rates but if you guys

remember me well I've said this a few

times on the

channel where uh the last time I was in

St Barts actually the time prior I

apologize the time prior I was talking

to my good buddy Steve who has been one

of the top hedge fund managers he's

retired but was one of the top hedge

fund managers for 40 years in fact he

started in Japan in the late

1980s and this is right about when the

Yen was about 160 and the Ministry of

Finance came in and intervened in the

market to try to get the yen to

appreciate because it was declining

rapidly against the dollar and that's

when the Central Bank also started to

take interest rates up and I mean up I

mean from like 10 negative or 10

negative 10 basis points up to like

positive 10 basis points not really up

that much but they started this rate

hiking cycle if you want to call it that

which makes the Yen appreciate and

that's what blew up the Yen carry trade

but I was asking Steve I was like in

your experience over 40 years with

emerging markets and seeing the Japanese

do this and you know all of this

intervention by the central planners to

try to manipulate their currency how

many times has it

worked and he laughed at me and he said

it never works it never works he goes

this is the way it'll play out he goes

the central planners always come in and

try to do something to to combat What's

happen happening with the currency and

it'll work for a couple months and then

it'll just revert right back to where it

was before and inevitably eventually the

central planners will lose and the

market forces will win he goes that's

how it plays out every single time and I

said okay so what's the bottom line he

goes bottom line Yen's going to

200 that's that's exact ly what he said

he goes Yen's going to 200 there's no

way they're going to be able to continue

these policies they're going to have to

back off the Market's going to win so

it's funny to see this kind of playing

out because this is exactly how Steve

said it would play out but getting back

to the article here so let's go just go

back in time and revisit what happened

recall that four years on end the boj

and the government were doing everything

in their power to crush the Japanese

currency in hopes of sparking inflation

because remember this in fact you guys

remember prior to

co the uh Central planners in the United

States were doing the exact same thing

remember that was our big bugaboo in

2012 13 14 oh my gosh it's deflation

deflation deflation we have that

remember that the whole 2%

Target was not to get inflation down to

that Target it was to get inflation up

to the

Target remember that and that wasn't

that long ago and this is what Japan was

doing as well that deflation was the

enemy ah deflation ah scary we've got to

get we've got to raise consumer prices

because somehow that'll fix

everything all right so getting back to

the

article so the country they're talking

about Japan was stuck in a deflationary

debt trap seemed like the only possible

exit from its exis exist poal

implosion was to they're talking about

devaluing the Yen but then the Yen did

Crater to a 40-year low that's when I

was talking to Steve when it was at 160

and they were trying to intervene to

bring it down which they did which they

did obviously Japan scrambled to do the

opposite and intervened in the open

market on multiple occasions to contain

further selling of the currency as the

resulting inflation led to devastating

or devastated standards of living and

sparked outrage among local population

so they finally got the inflation they

had been trying to create over the last

20 years and they're like whoa uh sorry

I guess that wasn't such a good policy I

guess people don't like it when they

have to spend more and more and more of

their paycheck just to get the same

amount of stuff every single month who

would have known who could have guessed

so then they backpedal but in the

process I guess this really shook up the

government which is what Zero Hedge

talks about next

so they say uh sparked outrage among the

local population over runaway infl I

don't know if I call it runaway

inflation inflation got to like 2% but I

guess for Japan that's runaway

eventually resulting in the collapse of

the kashida

government which is they say what they

warned about last

June so here is just the real wages I

mean if you think real wages are bad in

the United States look at what they've

done here in Japan and so you can see

this blue line is nominal wage growth

let's oh shoot that takes us to Twitter

don't want to do that okay so this blue

line is nominal wage growth so the

politicians I'm sure were saying oh look

at this how amazing it is wages are

growing wages are growing wages are

growing but then it's like yeah but

they're not going up at the same rate of

inflation so what really matters is your

purchasing power which is represented by

this red line in Japan and you can see

that has gone straight down

getting back to zero Edge but it was

only when the boj decided to shock the

market with a surprise second rate hike

in

July even as the rest of the world was

aggressively cutting rates the Yen

soared so the Ministry of Finance

intervenes they probably sold dollars

into the market bought yen in order to

make the Yen appreciate from 160 so then

it goes from let's just say 160 to 150

but then the Central Bank comes in and

says yeah we're going to go on a rate

hiking cycle just so you guys watch

we're going to normalize interest rates

everyone's like oh my gosh the boj

they've done a complete 180 they're now

gonna fight inflation and they're going

to take interest rates up to three or 4

per. and so then the Yen strengthens on

the news and goes to let's say 140 and

then as Zero Hedge points out that's

when all the Yen shorts were annihilated

and it's not the people that were just

short the currency it's people that were

short the currency by and through the

Yen carry trade so they are borrowing

Yen over here at very low interest rates

they are taking the Yen turning that

into

dollars and then they're taking those

dollars and they're buying us assets as

an example I mean just look at the

spread let's assume the spread between

what they're borrowing at five basis

points and then let's say have to pay a

couple percent to transfer those yen

into Dollars okay fine but then what

happens is they're being paid let's say

5% on a treasury okay great we're

pocketing the

spread and what seems to be very low

risk

until the Yen strengthens and then what

happens is that makes the burden of your

debt increase to a point where you can't

pay it therefore you have to sell the

asset

to pay off the debt before you get

underwater a margin call if you will and

so this is what led to the the now I

just use treasuries as an example but a

better example would probably be even

riskier assets such as Clos just stocks

the NASDAQ

Etc the problem with this of course is

that not only do the Nik C crater

forcing the B to immediately come out

and defend the wealth

effect uh so but then stocks in the

United States o obviously got just

pummeled as

well but I want to point out before

moving for before uh moving further guys

is it's not just the Yen appreciate

appreciating which for forces those

people that took advantage of the Yen

carry trade to sell their us assets it

would also be a result of those assets

going down so you've got two pressure

points there you got two points of

substantial risk that would prompt that

Margin Call which would create this

unwind right now what I want to

do is I want to oh first this is

hilarious check out this chart

so this is

when H this is basically the boj and I

don't know if I've even told you the

punchline here but the boj came out and

said yep sorry we're not increasing

interest rates anymore we've done enough

we've done enough our rate hiking cycle

is over and so a few weeks ago when they

were saying you know real hawkish oh

we're going to take rates up to 1% two %

3% just you watch we're going to

normalize now just like my buddy Steve

predicted they come out and say well

actually um yeah that normalizing thing

yeah we don't really see a need for that

anymore so we're going to go ahead and

stop the rate hiking cycle you say wow

George that was how high did they get

with this rate hiking cycle right here

here Zero Hedge points out that they got

up to a whopping 25 basis points that is

one hell of a

cycle I don't know if I'd call that a

cycle or a a blip I think it's more of a

a rate hiking blip before they go back

down to inevitably what will be probably

negative which will take that Yen

straight up to 200 maybe who knows maybe

even higher but now let's get over

to kind of some Dynamics between or

behind the Yen carry trade go over to

Investopedia because

if the central bank has come out and

said okay the rate hiking cycle is over

what's that mean that means that the

risk of the Yen appreciating

further or creating an environment where

all those speculators let's say were

completely off sides the probability of

that is very low and as decreas

massively so one would

expect that all the speculators see this

they've called The boj's Bluff and now

that they have what are they going to

do they're GNA take that Yen carry trade

trade and it's going to go on to

hyperdrive because now you know they

can't increase

rates they can't do it and if you know

they can't increase rates then that

eliminates one of your risk pressure

points so if you were borrowing a

billion dollars let's say a few months

ago

now bye bye bye bye bye as Jim M Kramer

would say You're Gonna back up the

leverage Brinks truck you're going to

take that trade from a billion hell

you're going to take it up to 10

billion because now you have almost zero

downside with the Yen as it pertains to

the bank of Japan increasing

rates so then you got to think okay well

if now the Yen carry trade is going to

go into hyperdrive then what does that

mean for us risk

assets we're going to answer that

question or I'll give you my base case

here in a

moment but just as a review carry trade

borrowing at low interest rates and

investing the proceeds in an asset that

Pro provides a higher rate of return

borrowing Yen US Stocks let's

say but look at this chart this is what

I wanted to

highlight the pink shaded

area is or the I guess you want to call

it

the the purple line we'll say at the top

and the shaded areas the Delta between

that and the uh light blue line that

that's us interest

rates so this goes back to kind of what

Brent talks about all the time with his

dollar milkshake theory that the United

States likely can keep interest rates

higher not they can keep them high they

can keep them higher than places like

Japan and

Europe and we can see this really play

out there's a great visual with this

chart back in vulker days when the the

United States took rates up to 16% Japan

only took them up to

7.2 and you can see every single time

the United States has increased

rates if the boj has done the same they

haven't done it to the same degree not

even close and a lot of times when the

FED is in a quote unquote rate hiking

cycle the boj continues to drop rates

even further

I mean look at the GFC or prior to it

Greenspan took rates from call it 1% in

the United States all the way up to 5%

before everything blew up then while the

boj took rates from a

whopping

0.1% up to 80 basis points and what's

crazy what's crazy is they could at

least get them up to 80 basis points

back then now now they can't even get

him higher than 25 basis

points while the United States still has

the ability to take rates up to

5.25 so again if if I'm a Speculator if

I'm a Trader if I'm a like a Paul tutor

Jones type or a Stan dren Miller type

I'm looking at this and I'm licking my

chops I'm saying okay now the gig is up

with the boj they have shown me their

cards and their cards show they're done

they're done all this talk about rate

hikes it's all Bs and if anything

they're going to have to reverse course

so I am going to go to my bank and I'm

going to say how many trillions of Yen

can I borrow to buy us

assets that's official that officially

started today

today assuming that's when the boj made

this announcement let me make

sure because what we need to do guys is

we need to track when the boj made this

announcement and then what US assets do

over the next couple weeks because if

let's just say they respond positively

and we see a huge uptick in US risk

assets then there's a high probability

that this is a result or the Yen carry

trade was at least a

Tailwind to what is happening with risk

Assets in the United States that's very

important very

important okay let me I'm just scanning

this article guys to try to figure out

when they said it

assuming it was

today yeah I mean so this came out this

morning at 9:30 and this is actually let

me do this let me do

this let me just Google Bank of Japan

and then we'll look at the news from

today no rush to rate no

they keeping them

steady NOP zero Hedges on top of it this

must have been

something that they came out and

reported just this

morning I wish they would link to the

like the

Reuters press release or something like

that that shows

or maybe this is based on some of their

statements but the bottom line here is

this most likely came this news came out

either yesterday or today so over the

next two weeks we're going to have to

see how this impacts markets and what

I'm going to do once this video is over

is I'm going to try to figure out how we

can monitor how much yen is being

borrowed

and see we got to talk to Jeff about

that Josh you got to give us some

Insider information from Jeff because

I'm sure he has a trick of knowing to

what degree the Yen carry trade is being

put

on and so my point there is let's just

assume the NASDAQ goes up by 10% in the

next couple weeks well if no news has

changed based on my last video The

Narrative hasn't changed then and let's

just say the amount of Yen being

borrowed has skyrocketed and the charts

look the same we can assume that that

correlation might might be a result of

causation and then you say okay well if

the Yen continues to

plummet then the Yen carry trade is

going to get is going to continue to

increase which perversely is likely

going to give a Tailwind

to the stock market becoming even more

of a bubble than it already

is all right guys enjoy the rest of your

afternoon as always make sure that

you're standing up for Freedom Liberty

free market capitalism see you on the

next video