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Yen Carry Trade and the Subprime Crisis

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  • Masazumi Hattori
  • Hyun Song Shin

Abstract

Yen carry trades have traditionally been viewed in narrow terms purely as a foreign exchange transaction. This paper argues that the carry trade should instead be viewed in the broader context of global credit conditions. We show that the volume of yen funding that is channeled for use outside Japan is mirrored by fluctuations in the size of U.S. broker-dealer balance sheets. Differences in short-term interest rates across currencies help to explain the incidence of the carry trade, as does the measure of implied equity risk given by the VIX index. The conjunction of deteriorating credit conditions in the United States and the weakness of the dollar against the yen in the early stages of the credit crisis of 2007–08 can thus be seen as two sides of the same coin. Both can be seen as consequences of financial sector deleveraging in the United States. IMF Staff Papers (2009) 56, 384–409. doi:10.1057/imfsp.2009.2; published online 24 March 2009

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 56 (2009)
Issue (Month): 2 (June)
Pages: 384-409

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Handle: RePEc:pal:imfstp:v:56:y:2009:i:2:p:384-409

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Cited by:
  1. Hutchison, Michael & Sushko, Vladyslav, 2013. "Impact of macro-economic surprises on carry trade activity," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1133-1147.
  2. MacDonald, Ronald & Nagayasu, Jun, 2013. "Currency Forecast Errors at Times of Low Interest Rates: Evidence from Survey Data on the Yen/Dollar Exchange Rate," SIRE Discussion Papers 2013-100, Scottish Institute for Research in Economics (SIRE).
  3. Fong, Wai Mun, 2010. "A stochastic dominance analysis of yen carry trades," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1237-1246, June.
  4. Jan Priewe, 2010. "What Went Wrong? Alternative interpretations of the global financial crisis," Competence Centre on Money, Trade, Finance and Development 1002, Hochschule fuer Technik und Wirtschaft, Berlin.
  5. Sumila Tharanga Wanaguru, 2011. "Carry Trades and Financial Crisis: An Analytical Perspective," CAMA Working Papers 2011-33, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  6. Daniela Gabor, 2012. "Managing Capital Accounts in Emerging Markets: Lessons from the Global Financial Crisis," Journal of Development Studies, Taylor & Francis Journals, vol. 48(6), pages 714-731, June.

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