The 64,000-Yen Question

In Asia, the debate rages about how high the yen will fly before it comes crashing down to earth -- if it does at all.

After declining throughout the year, the yen has staged a mighty comeback in recent months. Since the Japanese currency ventured to 124 vs. the dollar in July, it has strengthened nearly 12%, reaching 108.50 in New York trading on Wednesday, a 52-week high.

It's not only the weak dollar that the yen is rising against, either. In recent weeks, the yen has risen by 6% against the South African rand and Brazil's real.

One of the big arguments about the sustainability of global equity and bond prices is whether investors will resume the carry trade, and in turn bring the yen back down. Opinions in Asia differ wildly.

Sean Darby, head of strategy at Nomura Bank in Hong Kong, has been skeptical about the sustainability of the yen carry trade since October last year, when he began cautioning the bank's clients against a potential knock-on effect of a carry-trade unwinding.

With the yen carry trade, global investors such as the big financial institutions and hedge funds borrow from the Bank of Japan at 0.5% interest rates and invest elsewhere for higher yields.

The practice has contributed to the massive gains in equities in Hong Kong, South Africa and Brazil this year as cheap Japanese debt has buoyed foreign share buying in local markets.

Darby says that there are three factors contributing to a carry trade unwinding, none of which look like they will reverse anytime soon. The first is that as investors steer clear from high-yield credit market debt on recent subprime jitters, the Bank of Japan is unlikely to be used as frequently at it was before August as a borrowing source.

Secondly, with the Federal Reserve and dollar-pegged countries and states like Hong Kong and Saudi Arabia cutting interest rates, there is less incentive to take advantage of the differential between rates in Japan and elsewhere.

« Previous Page

1 2 3 4

Next Page »