Japanese Yen Carry Trade Breaks down and threatens Global Stock Market Chaos Peter Schiff

SchiffGold sells precious metals. The company sells gold, silver, platinum, and palladium to investors seeking economic security and inflation protection.

SchiffGold offers direct purchase, secure storage, and precious metal investment advice. The company promotes physical metals over paper assets, reflecting Peter Schiff’s economic philosophy and skepticism of fiat currencies.

The economist, financial commentator, and investment advisor Peter Schiff is famous. He founded SchiffGold and is CEO of brokerage Euro Pacific Capital. Schiff is known for criticizing central bank and fiat currency policies. He frequently discusses market trends, economics, and investment strategies on television and radio. Schiff has written several economics and finance books.

Schiff examined the potential unwinding of the yen carry trade after the BOJ ended its zero-interest rate policy earlier this year. Schiff’s August 3 SchiffGold blog post says this prediction is coming true.

Central banks use ZIRP to boost the economy by setting interest rates low or zero. Businesses and consumers can borrow cheaper under this policy, encouraging spending and investment to boost economic growth. During recessions, it boosts demand and prevents deflation. Long-term ZIRP can cause asset bubbles and low savings returns.

Reuters reports that on July 31, the Bank of Japan (BOJ) announced a comprehensive plan to reduce its extensive bond buying and raised interest rates to their highest levels in 15 years, signaling a significant shift away from a decade of substantial stimulus. After eight years of negative interest rates, this rate hike, the largest since 2007, defied market expectations. After a two-day meeting, the BOJ board voted 7-2 to raise the overnight call rate target to 0.25% from 0-0.1%, raising the short-term policy rate to its highest level since 2008.

Schiff describes the yen carry trade as borrowing yen at low rates to buy T-bills and stocks. Schiff says Japan’s near-zero interest rates made yen borrowing attractive. Schiff notes that trade is becoming less attractive as Japan raises its rates and other countries lower theirs.

Due to the loss of almost-free borrowing, investors are selling their yen, increasing currency market volatility, Schiff says. Schiff notes that the yen has fluctuated since the BoJ ended ZIRP despite multiple stabilization efforts.

Schiff believes that the carry trade may continue as long as US interest rates are higher than Japan’s, but the Federal Reserve’s expected rate cuts this year and the BoJ’s willingness to hike are increasing the risks, making the trade less appealing.

Schiff claims that banks in Canada, Switzerland, Sweden, China, Mexico, Brazil, and the UK have cut rates despite high inflation, but Japan is an exception. Schiff says BoJ interventions have strengthened the yen by 8% against the dollar after its lowest exchange rate in 38 years. Schiff says higher Japanese rates make yen-denominated investments more attractive, but the carry trade could lead to a “reverse carry trade.”

A reverse carry trade involves traders borrowing yen to invest in lower-yielding currencies or assets, expecting the yen to weaken, according to Schiff. Schiff notes that the interest rate differential and yen depreciation allow them to convert these assets back into yen at a lower cost.

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