What is the Yen carry trade? Discuss its impact on India.

Topic: Economy

Q5. What is the Yen carry trade? Discuss its impact on India. (10M)

Difficulty level: Moderate

Reference: Indian Express

Why the question:

Yen carry trade is in the News due to its impact on the World’s stock market.

Key Demand of the question:

To explain the yen carry trade mechanism and analyze how changes in Japan’s monetary policy led to its unwinding, triggering global market reactions and its impact on India

Structure of the Answer:

Introduction: Begin by defining the yen carry trade.

Body:

1. Yen Carry Trade:
   • Definition: Borrowing in yen at low interest rates and investing in higher-yielding assets abroad.
   • Example: Japan’s zero or negative interest rates encourage this practice.
2. Impact of BoJ Policy Changes:
   • Background: BoJ’s recent interest rate hikes (from -0.1% to 0.25%).
   • Consequence: Strengthening of the yen and investors selling off foreign assets.
3. Global Market Impact:
   • Explanation: How the unwinding led to asset sell-offs, contributing to market declines.
   • Case Study: The market fell on August 5th, highlighting interconnected economic factors.
4. Indian Market Impact:

Conclusion:

Write a way forward.