Japanese Carry Trade

A carry trade is when you borrow money and use it to make another investment that you believe will be more profitable than the costs associated with borrowing. In the case of the Japanese yen carry trade, participants with the intention of investing in the U.S. will borrow money at low interest rates in Japan, convert the local currency (yen) to U.S. dollars, then invest those dollars in an asset or assets in the United States they believe will earn more than the cost of the loan in Japan. Assuming currency exchange rates are stable, the math is really quite…