Financial Supervisory Service Governor Lee Bok-hyun's Insight on Yen Carry Trades

In a recent financial situation review meeting, Lee Bok-hyun, the governor of the Financial Supervisory Service, shared his views on the current state of yen carry trades. Despite the Bank of Japan's decision to raise its short-term policy rate from 0.25% to 0.5%, the highest in 17 years, the incentive to unwind yen carry trades remains low. This is largely due to the widening U.S.-Japan interest rate gap and the yen's current weakness.

Understanding the Yen Carry Trade Strategy

Yen carry trade involves borrowing yen at low interest rates and investing in assets with higher returns elsewhere. The strategy faced a significant moment last year when the Bank of Japan unexpectedly raised its interest rate, leading to the unwinding of many yen carry trades. However, with the yen's current weakness and Japanese interest rates remaining low, the scenario has changed.

Monitoring Future Changes

Governor Lee emphasized the importance of closely monitoring future changes in external conditions, especially considering the market shocks experienced last year due to concerns over an economic recession. These concerns were heightened by the deterioration of U.S. employment indicators following the Bank of Japan's interest rate hike.