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Yen carry trade is a way of currency carry trade involving the Japanese yen. Carry trade is an trading strategy in which the trader borrows (buys) a currency with a low interest rate and lends (sells) a currency with a high interest rate. In this way they may make money on the difference between the interest rates.

This kind of investment is widespread among financial institutions, central banks and other large lending institutions, particularly at times when the the global currency markets are relatively stable and the international stock markets are overall bullish. In other words, it could be a profitable investment strategy at times of world economic stability and growth.

The Japanese yen is the currency most often taking part in carry trade. This is because over the past years it has consistently been a main currency with the lowest interest rate. The Bank of Japan, which controls Japanese interest rates, has established them at a a very low level since the late 1980s. Generally this is below 0.5%.

Actually you would not assume carry trade to be lucrative because the currency values would change to reflect the discrepancy in interest rates and this would balance out the potential returns. Even so, in practice there is a profit possibility as carry trades have the effect of weakening the borrowed currency. So yen carry trade keeps the yen artificially low.

Of course there is a risk that the trend will turn but due to the level of control exerted by the Bank of Japan, global confidence is usually quite buoyant. On the other hand, in the case of a significant financial crisis in the USA and the other main economic powers the yield of carry trade is bound to fall.

Indeed where there is a big change in currency rates such that the yen rises in value against the lent currencies, it is likely for the investors to lose money when it comes to reversing the position. Since there is a large amount of funds involved in yen carry trade it can have a significant destabilizing effect on the currency markets if market participants suddenly put aside this type of investment.

This scenario is known as the unwinding of yen carry trade. It happens when investors become averse to risk which would probably happen when the yen is strengthening against the lent currencies. This can have a significant influence on the value of yen forex crosses. As we saw, yen carry trade weakens the yen so the effect of the unwinding will be to strengthen the yen side of the pair even further.

Yen carry trade is for the most significant players in the international money markets. It is not something that an independent forex trader would usually expect to get involved in directly. Still, any forex trader invested in a yen pair has to comprehend yen carry trade and its influence on yen prices. Forex signals could be a helpful trading tool to predict, when the tide turns for yen pairs. There are a lot of forex signal services covering yen pairs online. Still, make sure that you trade only reliable forex signals!

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