The Bank of Korea (BOK) has estimated the total value of funds tied to the yen carry trade, which involves borrowing yen at a low cost to invest in other currencies and assets offering higher yields, at approximately 4,690 trillion won ($3.5 trillion). The central bank analyzed that about 302 trillion won ($227 billion), or 6.4% of the yen carry trade, could be liquidated in the event of global interest rate cuts.
In a report titled “Recent Changes in Yen Carry Trade Yields,” the BOK pegged the total yen carry trade funds at 506.6 trillion yen, or roughly 4,690 trillion won. The report mentions that since there is no precise definition or standard for measuring the size of yen carry trade, estimates can vary widely across institutions, with some putting the figure as high as 2 quintillion won.
The BOK divided yen carry trades into three categories: overseas securities investments by Japanese residents (465 trillion yen), yen-denominated loans issued by global banks (41.1 trillion yen), and net short positions in non-commercial yen futures (500 billion yen).
The yen carry trade typically involves borrowing yen at ultra-low interest rates and then reinvesting it in higher-yielding assets like the U.S. dollar or Mexican peso, which is then used to invest in bonds or other money market instruments that offer better returns. At the end of the investment period, investors convert their holdings back into yen to repay the loan. As long as the yen remains low against the dollar or peso, investors can pay back what they borrowed and make a profit.
The potential profit from the yen carry trade starts to fall once the yen’s value increases or when the value of other currencies decreases. A stronger yen, buoyed by the Bank of Japan’s interest rate hike, has recently forced investors to rapidly unwind their carry trades.
The BOK forecasted that investors will unwind more carry trades once major countries begin lowering interest rates following the Federal Reserve’s recent rate cut. The liquidation volume is expected to reach an additional 32.7 trillion yen (about 302 trillion won).
“The yen carry trade had generated positive returns since 2022, but after the yen’s value started going up in July this year, those gains turned into losses,” the BOK said.
