Gain More by Borrowing Less

The carry trade involves borrowing a currency with low-interest rates to invest in higher-yielding assets, primarily across currencies. This practice has evolved, with participants ranging from institutions such as insurance companies to various market actors utilizing the strategy for diverse investment purposes. Recent trends indicate a significant increase in yen-denominated borrowing as foreign currency, amounting to approximately 40 trillion yen. This data illustrates a robust engagement in carry trade activities, although not all borrowing is utilized for this purpose. The landscape of carry trades has returned to a semblance of normalcy after a brief period of market stress, highlighting the importance of learning from past market behaviors without triggering dysfunction, as seen in earlier financial crises.