Carry Trade Is Powering On as Investors Sidestep Yen’s Gains

Emerging-market carry trades have remained robust despite a recent intervention by the United States and Japan, aimed at strengthening their respective currencies. The Bloomberg EM FX Carry Risk Premia Index has only decreased by approximately 1% since Japan's intervention, comparable to the decline seen in a benchmark tracking major currencies.

This stands in stark contrast to the more significant 4% drop in August 2024, following a sharp appreciation of the yen that sparked global market turmoil as investors sought to manage their yen-denominated debts. The relatively tame reaction has reassured market participants, suggesting that the renewed focus on diversified currency strategies has mitigated concerns about a repeat of the 2024 crisis.

This shift has prompted a migration away from yen-based financing, with investors increasingly leveraging currencies like the euro and the Swiss franc to fund investments in emerging market opportunities.