Carry Trade and Japan's Zero Interest Rate Policy - Essay Example

Gradually, when the Japanese currency started appreciating, the impact became all too apparent that in the globalized and networked economies, no country can consider itself safe, if there are adverse signals from one corner of the world. Carry trade is termed to be an important factor in such a scenario, which has led to cascading effects for the majority of exporters and manufacturers of cars and electronic products. While on the one hand exports are down and production is down, on the other hand, a large number of job losses is causing a further slide in the economy. This raises curiosity about the importance of carry trade in this scenario. Carry trade, as the name suggests is the trading activity that one indulges in by carrying forward the returns or losses of the holdings by an individual or a business entity. The yen has been a popular instrument amongst the trading community as an important tool for holding foreign exchange and dealing in financial transactions. Selling the Yen at lower interest rates and then using the funds for purchasing higher-interest currencies like dollars or pounds would yield considerable profits. Such a carry trade prospered, with the hope of sustaining the higher swap ratio and lower interest rates on the Yen.  But, with western economies reeling under recession, the Yen has considerably become strong, resulting in some loss-making propositions for carrying trades. This has brought the issue of carry trade into focus. The author of this study is in an effort towards analyzing the trends in Carry trade over the years and its impact on the economic conditions of different countries. An effort will also be made to foresee futuristic trends while analyzing and comparing the development of the markets.

Chapter-1: Introduction

The author of the paper is of the view that economic activities, financial services, and banking have experienced quite a few changes in the last couple of decades. With the opening up of economies, industrial activities saw an upsurge on a global scale.