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The Yen Carry Trade Is Back On

Updated on September 18, 2012
European trade is no longer a source of income
European trade is no longer a source of income | Source

World Trade Is Dead

Global Trade is no longer a source of income
Global Trade is no longer a source of income | Source

Foreign Exchange traders have been steadily accumulating Yen; based on their perceptions of Japan's deflationary cycle spiralling downwards. The latest trade data with Europe show that a source of Japan's surplus has just been lost to European austerity and the strong Yen. Japan has therefore lost a source of current income to pay its rising domestic debts; leaving tax revenues as the remaining source. The slowing economy and declining export trade are however also reducing tax revenues.

Japan is therefore now at a point at which it must accelerate the process of debt monetization. To prevent this from becoming a crisis in itself, Japan can allow the Yen to fall in value. A falling Yen will then increase the value of the income Japan earns on its foreign assets. Japan will then pay its debt liabilities with the income from foreign assets. As the Japanese economy slows and the population ages further, the need to live off foreign income will become greater. The Yen thus becomes a funding currency to acquire foreign assets that will match Japan's liabilities.

The Yen Carry Trade is back on. Buying Gold in Yen terms is the way to finesse this scenario.

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