The attractiveness of yen financing has weakened, but the enthusiasm for carry trades remains strong.

Even though the joint intervention by the U.S. and Japan in the foreign exchange market has weakened the attractiveness of yen-funded carry trade strategies, one of the most popular trades in the foreign exchange market this year, emerging market carry trades, has shown remarkable resilience. Since Japan's direct intervention to boost the yen's exchange rate, Bloomberg's emerging market foreign exchange carry trade risk premium index has fallen by about 1%, similar to the decline seen in benchmark indices for G-10 currencies. This sharply contrasts with August 2024, when the yen appreciated significantly, prompting traders to rush to repay yen financing, leading to severe fluctuations in global markets, and the emerging market carry trade index once dropped by 4%. The market response has been relatively mild, alleviating concerns about a repeat of the carry trade collapse in 2024, and indicating that investors have gradually reduced their reliance on yen financing, turning instead to currencies such as the euro and Swiss franc to raise funds for investments in high-yield assets in emerging markets. Although the Brazilian real has fallen 4% against the yen since the start of the currency market intervention, it has remained largely flat against the dollar and has only decreased by 0.8% against the euro.