Japanese central bank’s policy inaction increases the allure of dollar-yen carry trade

The dollar-yen carry trade just got more appealing for investors, thanks to the Bank of Japan.

The US-Japan policy divergence has gained more prominence with Governor Haruhiko Kuroda’s adoption of forward guidance to convey that rates in the Asian nation will stay extremely low for an extended period.

That burnishes the appeal of the arbitrage trade, say Mitsubishi UFJ Kokusai Asset Management and Mizuho Securities, given the Federal Reserve’s projection of raising interest rates five times through end-2019.

The carry-to-risk ratio - which compares interest-rate differentials with implied currency volatility to gauge attractiveness of a carry trade - is the best for the dollar among G-10 exchange rates versus the yen.

“The forward guidance is a positive for carry trade,” said Kiyoshi Ishigane, chief strategist at Mitsubishi UFJ Kokusai in Tokyo. “The BOJ has decided not to move. The yen is unlikely to strengthen from the perspective of monetary policy.”

Borrowing in yen to purchase dollar assets earned investors 4.9 per cent in the April-June period, the best total carry return among the Group-of-10 nations when taking the yen as the funding currency, data compiled by Bloomberg show. Returns take into account the change in exchange rates, interest income and the funding costs.