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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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| Published in: | IMF staff papers 2009-06, Vol.56 (2), p.384-409 |
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| Main Authors: | , |
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| Language: | English |
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| cites | cdi_FETCH-LOGICAL-c596t-63384cb9e3a6eea06b83a329597c25a51fd1b0effe1d72ee8f7dccd8bf6cfd783 |
| container_end_page | 409 |
| container_issue | 2 |
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| container_title | IMF staff papers |
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| creator | Hattori, Masazumi Shin, Hyun Song |
| description | 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. |
| doi_str_mv | 10.1057/imfsp.2009.2 |
| format | article |
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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. 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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.</abstract><cop>London</cop><pub>Palgrave Macmillan</pub><doi>10.1057/imfsp.2009.2</doi><tpages>26</tpages></addata></record> |
| fulltext | fulltext |
| identifier | ISSN: 1020-7635 |
| ispartof | IMF staff papers, 2009-06, Vol.56 (2), p.384-409 |
| issn | 1020-7635 2041-4161 1564-5150 2041-417X |
| language | eng |
| recordid | cdi_proquest_miscellaneous_37285634 |
| source | International Bibliography of the Social Sciences (IBSS); JSTOR Archival Journals and Primary Sources Collection; PAIS Index |
| 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 |
| title | Yen Carry Trade and the Subprime Crisis |
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