Proxying the Yen Carry Trade

August 18, 2024

The big story over the past two weeks has been the unwinding of the yen carry trade. This trade involves borrowing yen at low rates in Japan and investing the funds in higher-yielding foreign currencies, such as the US dollar or the Mexican peso. Many have argued that a surprise rate hike from the Bank of Japan on 31 July and disappointing US labour market data on 2 August triggered the collapse of this trade. As a result, the yen surged, equities stumbled, and government bonds rallied. While not much is known about the exact scale of the yen carry trade, this post explores two methods of proxying it.

Method one: Tracking yen credit to borrowers outside Japan via BIS

One method to track the yen carry trade was suggested by Hyun Song Shin, Economic Adviser and Head of Research at the Bank for International Settlements (BIS) in a X/Twitter thread on 9 August. Shin pointed to the BIS Global Liquidity Indicators data Q.JPY.3P.N.B.I.G.JPY, which is quarterly data that tracks yen-denominated loans as foreign currency, excluding yen securities. By the end of March 2024, these loans tallied just above 41 trillion JPY, up from about 30 trillion pre-pandemic. Shin notes that not all of this reflects carry trade activity, so this figure should be considered a ceiling for carry trades conducted on-balance sheet.

Shin further explains that carry trades can also be done through FX swaps, where a lender provides dollars in return for yen. The dollar provider normally parks the yen proceeds in a safe yen asset, such as short-term Japanese government bonds. But if the dollar provider instead sells the yen proceeds in the spot market for dollars, it leaves an unhedged yen obligation which is a carry trade that isn't captured in BIS data. Shin points to this study, which puts the size of dollar/yen FX swaps at around 14 trillion USD, with about 1 trillion USD held by foreigners in official assets.

Method two: Monitoring foreign bank borrowing from Tokyo offices via BOJ

Another method for proxying the yen carry trade that's especially popular in Japan is monitoring foreign banks' borrowing from their Tokyo offices. A bank with a global presence can raise yen through its Tokyo branch. When that happens, the Tokyo office acquires a claim on the foreign office through interoffice accounts. This data is available at monthly frequency through the Bank of Japan's release on Principal Assets and Liabilities of Foreign Banks in Japan data BS02'FAFBK_FAFB2A9. As of May 2024, foreign borrowing from Tokyo offices was about 11 trillion JPY, up from an about 7.5 trillion pre-pandemic.

Here is an R script to produce the charts above.

Update (1 September 2024): The BIS has released new analysis on the carry trade unwind which shows additional data for yen claims on non-banks in offshore centres. This data is part of the Locational Banking Statistics and can be compiled by summing up the figures for offshore economies, starting with the Cayman Islands under the code Q.S.C.A.JPY.A.5J.A.5A.N.KY.N. Alternatively, you can visit the Bank of Japan's statistics portal and download the flat file for BIS International Locational Banking Statistics in Japan (Claims), which contains the relevant totals under indicator codes BIS3G00103203200071N and BIS3G00303203200071N.