Yen carry trade has returned in a big way with the DollarYen currency climbing 17.3% to its recent peak of 118.66 from its November low. This has unleashed a rally in equities especially among the Developed Markets. Within Asia, Japan Nikkei Index was the top performer with total returns of 11.3% in the past two months.

The surge in the DollarYen currency signifies the return of yen carry trade, often known as the “Mrs Watanabe.” In the 1990s, “Mrs Watanabe” is referred to the typical Japanese housewife investor who engage in carry trade by borrowing low-cost currency like the yen and simultaneously investing the borrowings in higher yielding currency.

We share three thoughts on the yen carry trade:

  • Abe and Trump are Best Friends Forever (BFF)
  • Dovish stance in December BOJ meeting
  • DollarYen currency = risk indicator
  1. Best Friends Forever (BFF) Abe and Trump

Japan’s Prime Minister Shinzo Abe was the first foreign minister to personally meet Donald Trump after he won the US Presidential elections. The meeting was warmly received by both sides with Trump commenting that it was the start of “a great friendship.” Likewise, Abe remarked that he looked forward to “establish a relationship of trust.”


Our dear Mrs Watanabe absolutely loved the meeting, enlivened from seeing Abe and Trump shaking hands on the backdrop of gold-infused Trump Tower. The DollarYen currency rallied another 5.8% and trigger a rally in BFF markets of US and Japan equities.

  1. Dovish stance in December BOJ meeting

At its 20 December meeting, the Bank of Japan (BOJ) maintained its loose monetary policy by keeping 10-year JGB yield within 10bps of its 0.0% target. In addition, it upgraded its outlook for Japan in 2017 with the economy likely to turn to a “moderate expansion” on the back of rising exports and consumer demand.

BOJ governor Kuroda also downplayed the yen weakness following Mr Trump’s election, attributing it as a sign of dollar strength rather than yen weakness. He added that it was “much too early” for the policy board to consider modifying its rates targets. This helped to alleviate concerns that BOJ may move to raise its target level for the 10-year JGB yield in response to yen depreciation. A dovish stance was also communicated when Kuroda reiterated that Japan was “still a long ways” from its 2% inflation target.

3.USDJPY currency = risk indicator

The Yen is used as a funding currency to invest into risk capital especially in Japanese and US equities. The borrowers are effectively shorting the yen and betting that it will depreciate. In a risk off environment, the borrowers will sell off their equities position, unwind their borrowings and buy back the yen. This will result in the appreciation of yen. Therefore, it will be key to look at key levels of USDJPY as an indicator for global risk aversion. A pullback of USDJPY to below 115 will be a strong signal for risk off.

6-month chart of USDJPY


Source: Bloomberg

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