Odd Lots Hyun Song Shin on How Big the Yen Carry Trade Really Is
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Aug 29, 2024 Hyun Song Shin, an economic advisor and head of research at the Bank for International Settlements, dives into the intricacies of the yen carry trade. He explains how this strategy, involving borrowing low-yield currencies, has influenced recent market turbulence. Shin discusses the key players in this global dynamic and debunks common misconceptions. He also highlights the role of FX swaps in enhancing liquidity and examines how today's financial conditions contrast with stock market performance. Insightful and timely, he unpacks the lessons learned from recent events.
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Carry Trade Size and Mechanics
- Yen borrowing increased sharply in 2022-23, reaching $270 billion through on-balance sheet lending.
- However, off-balance sheet FX swaps, around $14 trillion, play a much larger role in carry trades.
Global Financial Conditions
- FX swaps enable investors to overcome currency constraints by funding investments with different currencies.
- This makes financial conditions a global phenomenon rather than a country-specific one.
Dollar-Yen FX Swap Basis
- Borrowing dollars via FX swaps is usually more expensive than in dollar money markets.
- However, during the recent stress event, the dollar-yen FX swap basis didn't spike significantly, unlike in March 2020.