May 15, 2014 12:09 am JST

Widening interest rate gaps reviving yen carry trade

TOKYO -- Market players are speculating about a return of the yen carry trade amid rising interest rates in such markets as New Zealand and decreased volatility.

     Reserve Bank of New Zealand Gov. Graeme Wheeler commented Wednesday that carry trade activity from Japan is picking up. These transactions involve borrowing yen at low interest rates and selling it on foreign exchange markets to buy higher-yielding currencies.

     The New Zealand dollar is on an upswing against the yen, trading at around 88 yen to the kiwi. "(Wheeler's) comments were probably meant as a check on currency appreciation," says Kengo Suzuki at Mizuho Securities.

     The value of yen short positions held by speculators has not reached the level from the mid-2000s, when carry trades caused the yen to slide. "But it seems like carry trades are gradually picking up," says Maki Ogawa at Citibank Japan.

     The revival of the yen carry trade depends on two conditions. One is low volatility. The yen's one-month implied volatility against the dollar in the foreign exchange options market has dropped to the upper 5% range -- down by half from a year earlier and about the same as in the mid-2000s.

     The other requirement, an interest rate gap, is growing larger. New Zealand's central bank hiked rates in March and April, and emerging markets have raised rates to protect their currencies and tamp down inflation. This has created an environment friendly to retail forex investors looking to profit from a stable spread.

     "The interest rate difference is lacking compared with the heyday of the yen carry trade, but attention to high-interest-rate currencies such as the New Zealand dollar, the South African rand, and the Turkish lira is growing," says Takuya Kanda at the Research Institute.