ANALYSIS-Bank of Japan's opaque policy shift means stronger, wilder yen

Jul 29, 2023 | News On Japan

TOKYO - The Japanese yen is on a bumpy path towards strengthening after Friday's central bank policy change, threatening to upend the carry trade, one of this year's most popular strategies, as the currency inevitably becomes more expensive.

The BOJ kept its short-term interest rate target below zero, but shook markets by adjusting a policy that had effectively capped the 10-year government bond yield at 0.5%.

The wild swings in the yen, which saw its most volatile trading day for months, reflect the initial confusion among traders and investors about what this might mean.

But two things are already clear: trading in the yen will be choppy, and have a knock-on impact on markets beyond Japan.

A rocketing yen has major implications for risk assets that have been at least in part supported by the trillions of dollars in global liquidity the BOJ has effectively exported.

In what is known as a carry trade, investors have borrowed cheaply in yen to fund bets in higher-yielding currencies like the dollar or the Mexican peso, making money on the difference. ...continue reading

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