The End of Yen-carry Trades?

With the recent meltdown and volatility of global financial markets, there has been signs of significant withdrawal of Yen carry trades around the world's financial markets. Yen carry trades had been the biggest contributor to global flush of liquidity, aided by the low interest rates in Japan and therefore investors resorting to investing in high yielding assets globally by borrowing cheap Yen, which implies low cost of funding. Due to the fear of financial credit crunch as a result of US subprime financial woes, investors have become risk averse (due to rising currency, i.e, Yen) on high yield and risky assets, such as equity related securities, which therefore sparked the selling off of such assets globally. The rise of Yen could become a double-edged sword, in the sense that the cost of borrowing increases, and at the same time the exchange rate for the currency of domain investment destinations weakens against Yen.

Moreover, with the expected upcoming improvement in Japanese economy, it is harder to expect interest rates in Japan would be kept at such low level. In fact, it is likely that Bank of Japan may raise interest rates further sometime this year.

All this could be a signal that Yen-carry trades will continue to be liquidated going forward. The bad news is volatility in global financial markets may continue to persist from time to time until the amount of Yen carry trades become less significant. How long? I am afraid this will be a journey, not an event!