Yen Carry Trade and the Subprime Crisis

Yen carry trades have traditionally been viewed in narrow terms purely as a foreign exchange transaction. This paper argues that the carry trade should instead be viewed in the broader context of global credit conditions. We show that the volume of yen funding that is channeled for use outside Japan...

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Bibliographic Details
Published in:IMF staff papers 2009-06, Vol.56 (2), p.384-409
Main Authors: Hattori, Masazumi, Shin, Hyun Song
Format: Article
Language:English
Subjects:
Analysis
Balance sheets
Bank accounts
Bank assets
Bank liabilities
Bank loans
Banking crises
Capital Markets
Currency transactions
Economic crisis
Economic Policy
Economics
Economics and Finance
Exchange market
F31
F32
F33
Financial crisis
Financial intermediaries
Foreign exchange
Foreign exchange rates
Funding
Indexes
Interest rates
International Economics
International trade
Macroeconomics/Monetary Economics//Financial Economics
Mortgage markets
Mortgage-backed securities
Special Section: Global Reach? Perspectives on U. S. International Spillovers
Studies
Subprime loans
Yen
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Summary:Yen carry trades have traditionally been viewed in narrow terms purely as a foreign exchange transaction. This paper argues that the carry trade should instead be viewed in the broader context of global credit conditions. We show that the volume of yen funding that is channeled for use outside Japan is mirrored by fluctuations in the size of U. S. broker-dealer balance sheets. Differences in short-term interest rates across currencies help to explain the incidence of the carry trade, as does the measure of implied equity risk given by the VIX index. The conjunction of deteriorating credit conditions in the United States and the weakness of the dollar against the yen in the early stages of the credit crisis of 2007-08 can thus be seen as two sides of the same coin. Both can be seen as consequences of financial sector deleveraging in the United States.
ISSN:1020-7635
2041-4161
1564-5150
2041-417X
DOI:10.1057/imfsp.2009.2