Japan's descent into a negative interest rate policy should have weakened the yen, but instead it's spurring a rally as appetite for using the currency to fund other bets wanes.
The yen strengthened on Thursday to highs not seen since October of 2014, with the dollar fetching as few as 110.98 yen. That's despite the Bank of Japan (BOJ) blindsiding global financial markets on January 29 by adopting negative interest rates for the first time ever - a move that should spur outflows of the local currency, not inflows.
Instead, a confluence of factors - worries about banks' profits, a commodities price slump and uncertainty over the Federal Reserve's hiking path - is causing an old favorite, the yen carry trade, to fall out of fashion, which means the currency is moving in the opposite direction to that expected in the wake of the BOJ's surprise rates move.
"The advent of negative rates is compounding concerns about underlying strains in the financial sector and bank profitability," Ray Attrill, co-head of foreign-exchange strategy at National Australia Bank, told CNBC's "Street Signs" on Wednesday.
Japanese investors are repatriating funds in part because the BOJ's move sparked concerns that other central banks could wage a campaign of competitive rate cuts in response. This in turn caused worries about global banks' earnings because negative interest rates in Japan - as well as low interest rates globally - dents the banks' net interest margins. That's a driver of why bank shares have sold off particularly viciously in recent weeks amid a wider global market rout.