Monday, March 17, 2008 0 comments ++[ CLICK TO COMMENT ]++

Yen Carry-trade Continues to Unwind

The Yen carry-trade is continuing to unwind as the US markets weaken. The Yen is up around 10% for the year against the US$ (the chart shown below is Yen against a basket).


(source: stockcharts.com)


Many investors, including me, have been expecting the Yen carry-trade to unwind for a while now. If the US markets correct much further, I actually think the US$ may stabilize or start to rally. It seems unlikely but there has often been big capital flight into US$-denominated assets during crises in the past.

The strengthening Yen will present an interesting situation for Japan. For the last decade or more, Japan has relied heavily on exports. This is why the JCB was always tried to manipulate their currency downwards. If the Yen strengthens, Japanese exports will get hit and the economy can't depend on exports to the same degree as they have in the past. It remains to be seen how well Japan adjusts to the stronger Yen (assuming the Yen does strengthen permanently). Their government isn't very free-market-oriented (I mean, they can't even pick a central banker replacement without political problems) and their population is aging.

The ultimate investment would be something like Japanese real estate--if real estate actually ends its 18-year bear market. You would get the benefit of a strengthening Yen on an asset coming out of a multi-decade bear market. (I posted about historical Japanese land prices in a prior post).

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