Explaining Japan's Yen 'Repatriation Trade'

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In the wake of the crisis in Japan, the yen has strengthened dramatically.

This is counter-intuitive. Usually, when a country's economy is expected to weaken, so does its currency. But, currency traders explain, Japan is a unique case.

Imagine you live in Japan where, for the last 20 years, the central bank has kept interest rates at nearly zero in an effort to stimulate the economy. If you put your money in a bank or a certificate of deposit, you earn nothing in interest.

As a result, you as a Japanese individual are far more likely to invest in overseas assets, like US Treasuries, for instance, to a much greater degree than those in other countries. While long-term Treasuries are only paying interest rates of 3- to- 4 percent, that's still a lot better than zero.

Then the earthquake happens. Now, you have to pay for the reconstruction of your home or perhaps your business. To raise cash, you sell some of your assets, maybe those US Treasuries.

But when you sell a dollar-denominated asset, you receive your payment in dollars. So if you sell a pile of US treasuries, you get a pile of US dollars as a payment.

But you can't pay your construction workers in dollars. You can't buy your building supplies locally in dollars. You need yen. So you use your dollars to buy yen.

Now imagine that happens en masse with millions of people, businesses and insurance companies. All of those people and companies are buying yen. That is a huge increase in demand.

Admittedly, this is a vast over simplification, but it helps you better understand the theory being put forth by many in the markets. They call it the repatriation trade.

Many market participants say the Japanese just aren't going to repatriate that much money. Or even more likely, that Japan's Finance Ministry is going to fight the rise of the yen tooth and nail by flooding the markets with supply to drive down the price.