Understanding the Yen Carry Trade

A carry trade involves borrowing in a currency with low interest rates and investing in a currency with higher interest rates, enabling investors to earn the spread between the two. The yen has historically been a low-yielding currency, making it attractive for funding investments in higher-yielding currencies like the US dollar or emerging markets. For instance, there was a significant interest rate differential between Japan and the US following the pandemic, creating opportunities for substantial returns. Additionally, investors benefited not only from the interest rate spread but also from potential currency movements, which could amplify profits.