Beware of the carry trade

The yen-carry trade, borrowing yen to buy higher-yielding assets, has been a popular investment strategy in recent years. However, the BOJ announced earlier this year that it ended its Quantitative Easing. This move probably helped fule the spiraling selloff in May and sending the yen higher. The yen has since receded back to previous levels. The Japan economy is heavily dependend on export and capital spending since it lacks domestic demand, and the BOJ may therefore be cautios to raise interest rates. But carry traders should still be wary since the dollar is likely to continue its fall which extends to a higher yen. The dollar is off about 30% against the developed world, mostly against the euro and very little agains the yen. So even if the dollar is done devaluing against the euro it probably has more to come against the yen. Just remember, there's no such thing as a free-lunch.