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The Carry Trade, Portfolio Diversification, and the Adjustment of the Japanese Yen

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Author Info
Corinne Winters
Abstract

In this paper, the author considers whether fundamentals or other factors can explain the yen's ongoing weakness. In particular, the importance of capital outflows due to the carry trade and longer-term portfolio investment outflows, which may be delaying the adjustment of the yen, are investigated. A simple portfolio model is developed, composed of a speculative component and a minimum variance portfolio, to address the underlying motivation for capital outflows from Japan over the past ten years. The author's main findings suggest that a substantial portion of outflows may be attributed to diversification. Furthermore, given that considerable 'home bias' remains in Japanese households' portfolios, the results suggest that capital outflows from households, largely driven by diversification, may continue to dampen a long-run appreciation of the yen going forward. That said, evidence of substantial speculative outflows, through carry trades, complicates the outlook for the yen.

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File URL: http://www.bankofcanada.ca/en/res/dp/2008/dp08-2.pdf
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Paper provided by Bank of Canada in its series Discussion Papers with number 08-2.

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Length: 33 pages
Date of creation: 2008
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Handle: RePEc:bca:bocadp:08-2

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Related research
Keywords: Exchange rates; International topics; Recent economic and financial developments;

Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F31 - International Economics - - International Finance - - - Foreign Exchange
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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