CICC: The narrowing US-Japan interest rate differential suggests that the risk of a reversal in yen carry trade may continue in the future

The CICC research report points out that recently, global assets have fluctuated significantly, and the reversal or closing of yen carry trades is an important financial force behind it. On August 7th, Japan's Deputy Governor Uchida Shinichi stated that he would not raise interest rates during market instability. The turmoil brought about by the reversal of yen carry trades has temporarily eased, but referring to historical rules, we believe that its risks may not be completely eliminated yet. Historical patterns show that the reversal of carry trades generally stabilizes within 3 to 5 months. At the same time, the long-term interest rate difference between US and Japan has a good leading effect on yen carry trade. Compared with five rounds of yen carry trade reversals since the 1990s, we believe that current process might just be halfway through. In addition, narrowing US-Japan interest rate differentials suggest future risk for continued reversals in yen carry trading.