Aug 05, 2024 01:23 PM IST
The BoJ raised its short-term policy rate from -0.1% to between 0 and 0.1%. Experts believe the move is expected to have an adverse impact on carry trade.
On July 31, the BoJ announced that it was raising its short-term policy rate from -0.1 per cent to between 0 and 0.1 per cent. Experts believe that the move is expected to have an adverse impact on carry trade.
Japanese stocks collapsed in their biggest single day rout since the 1987 Black Monday selloff. The Nikkei share average shed 12.4% and yen rallied to 7-month highs versus the dollar. Japan’s banking stocks led the rout, which pushed the Nikkei into bear market territory given its 27% drop from a July 11 peak of 42,426.77. The index had wiped out 113 trillion yen ($792.32 billion) of that peak market value.
Read more: Will US economy go into recession? Goldman economists lift ‘limited’ risk to 25%
What is carry trade?
Carry trade is a strategy that involves borrowing money in a currency which has a low-interest rate and investing it in asset classes that give a higher rate of return. The strategy is not only popular among forex traders but also used by fund managers who deal in equities and commodities.
Read more: Bitcoin plunges, Ether sees worst drop since 2021 amid US recession fears
Does carry trade apply only to currencies?
No, it is primarily used with forex but carry trade is not limited to currencies only. Investors can employ carry trade by borrowing money in a currency with lower interest rates and deploying the capital in various asset classes.
How will Bank of Japan’s rate decision impact traders?
Read more: How volatile is Indian stock market? Should you buy, hold or sell?
As borrowing of the yen becomes more expensive due to higher interest rates, traders’ profit margin will shrink. Moreover, higher interest rates could attract more foreign inflows into Japan which could further strengthen the currency which in turn could increase losses for the traders.
