The Japanese yen on Friday headed for its biggest weekly gain against the dollar in 14 months, raising fears about the unravelling of the global carry trade.
The continuing strengthening of the yen comes in the wake of a widespread downturn and volatility across the global equity markets – which initially started on Tuesday when the mainland Chinese stock market fell by nearly 9 per cent.
The selling of equities appears to have been triggered by a strengthening of the yen. A stronger yen puts pressure on global carry trades, because it makes it less attractive to sell the low-yielding Japanese currency to buy higher-yielding assets in other currencies.
Some analysts have said that investors who faced losses in equities were closing profitable carry trade positions. As the Japanese yen strengthened, high-yielding currencies, including the New Zealand dollar and the South African, tumbled on Friday.
Japan’s currency has already gained almost 3 per cent this week, the biggest increase since late 2005, and was at 117.66 against the dollar in late trading in Tokyo on Friday. On Thursday, the yen reached 116.97 against the dollar, the highest since December 13, after rebounding from a four-year low of 122.19 at the end of January this year.
Eisuke Sakakibara, Japan’s former vice-finance minister once universally referred to as Mr Yen, said currency traders had long enjoyed an unusual period of stability, but that conditions “could change this year”.
However, he predicted that this week’s movement was not the start of carry trade unwinding, saying he expected the yen to trade within a Y115-Y120 range against the dollar for the rest of the year. “The carry trade is going to continue for some time and the weak yen tendency is not going to be reversed so quickly,” he said.
Mr Sakakibara said the Bank of Japan, which last week raised rates a notch to 0.5 per cent, could move again faster than markets expected, and that a rate rise as early as May was possible. However, he said that, as long as interest rate differentials with the rest of the world remained so high, a rapid unwinding of the trade was unlikely.
Hiroko Ota, economy minister, said the strengthening of the yen in the past few days would not have a substantial effect on the economy. The weakness of the yen, a by-poroduct of low Japanese interest rates, has provided a significant boost to exporters, still the main engine of growth.
Meanwhile, the yen on Friday was headed for its biggest weekly gain against the UK pound since December 2005, trading at 230.47. It was on course for its biggest weekly rise in more than a year versus the Australian dollar, trading at 92.44. Against the New Zealand dollar, it stood at 81.59 and against the South African rand it stood at 31.3954. On the week, the yen has gained 4.8 per cent against the New Zealand dollar and 5.9 per cent against the South African rand.
Investors are likely to be on edge ahead of the opening of trading in European and US markets. Asian, European and US stock markets closed in negative territory on Thursday. The Japanese stock market continued to fall on Friday with the benchmark Nikkei average down nearly 1 per cent in afternoon trading – erasing all its gains for the year.
