Wall Street analysts warned that disorderly unwinding of the yen carry trade could damage US markets. David Morrison, senior market analyst at Trade Nation, stated that yen carry trades have driven liquidity and asset prices in US markets, but risk factors disrupting the dollar-yen ecosystem now threaten American equities. The USD/JPY rate recently hit its highest level since December 1986, hovering around 162 yen, while Japan's 10-year government bond yield rose 150 basis points over the past year.
USD/JPY Hits 39-Year High as Japanese Government Intervention Risk Grows
Business Insider identified Japanese government intervention to strengthen the yen as the first risk factor. The USD/JPY exchange rate recently reached its highest level since December 1986, approximately 39 and a half years ago, and continues to trade around the 162 yen level. Government intervention to address this could erode returns for investors who borrowed in yen to invest in dollar assets.
Morgan Stanley analysts explained that the 160 yen level for USD/JPY is typically a significant threshold where the yen rebounds. Morgan Stanley stated in a recent report that "historically, yen strength has often emerged following such situations."
BOJ Rate Hike Potential Threatens Carry Trade Dynamics
Business Insider pointed to the possibility of the Bank of Japan raising interest rates as a second risk factor. Japan's relatively low interest rates compared to other countries have been the core driver of yen carry trades, and rate increases could cause investors to sell dollar assets to offset rising borrowing costs, resulting in carry trade reversals.
Mark Malek, chief investment officer at Siebert Financial, warned that "changes in Japan's monetary policy could increasingly have significant effects on US asset prices," adding that "market participants may be underestimating Japan's influence on global liquidity conditions."
Rising JGB Yields Challenge US Equity Valuations
Business Insider identified concerns about fiscal deficits already pushing up government bond yields as a third factor increasing the possibility of yen carry trade liquidation. Japan's 10-year government bond yield has risen 150 basis points over the past year, and Japanese government bond yields have continued their upward trend recently.
Albert Edwards, strategist at Societe Generale, stated in a report that "investors have become immune to warnings that massive Japanese government debt could trigger a crisis, mainly because skeptics have been consistently wrong," but added that "this situation seems a bit different." He explained that "for example, if Japan's 10-year government bond yield continues rising to reach levels above 4% in the US, I don't think the US stock market can sustain forward price-to-earnings ratios exceeding 20 times." If Japanese government bond yields continue to rise, investor incentives to invest in US assets would decrease, and existing yen carry trade liquidation could pressure valuations of dollar assets including US stocks.
FAQ
What is the yen carry trade and why does Wall Street worry about its unwinding?
The yen carry trade involves borrowing in yen at low interest rates to invest in higher-yielding dollar assets. Wall Street analysts including David Morrison from Trade Nation warned that disorderly unwinding of these trades could cause widespread damage to US markets, as the strategy has helped drive liquidity and asset prices in American equities.
What level did the USD/JPY exchange rate recently reach?
The USD/JPY exchange rate recently reached its highest level since December 1986, approximately 39 and a half years ago, and continues to hover around the 162 yen level. Morgan Stanley analysts noted that the 160 yen level is historically a significant threshold where the yen typically rebounds.
How much have Japanese government bond yields risen?
Japan's 10-year government bond yield has risen 150 basis points over the past year. Albert Edwards from Societe Generale stated that if Japan's 10-year yield continues rising to reach levels above 4% in the US, the US stock market cannot sustain forward price-to-earnings ratios exceeding 20 times.
