Carrying On With the Yen

Japanese 10,000 Yen bank notes
Luc Novovitch | Photographer's Choice | Getty Images
Japanese 10,000 Yen bank notes

The yen may regain its status as the currency of choice for carry trades now that the G7 has intervened to halt its rise. Is another rush into global assets coming?

Investors often used the yen for carry trades, or sales of low-yielding currencies to buy higher-yielding, riskier assets, until the financial crisis. Then the Federal Reserve forced U.S. interest rates lower, and the yen appreciated sharply against the dollar and lost its appeal in carry trades.

But now that central banks have intervened to halt the yen's post-crisis rise, investors may well start using the yen for carry trades again.

CNBC - Disaster in Japan - Japan Earthquake and Tsunami
CNBC - Disaster in Japan - Japan Earthquake and Tsunami

If that continues long term, it will create opportunities for investors to rush into higher-yielding riskier assets.

But in the near term, yen sales would further the Bank of Japan's goals, since a weak yen will spur export activity and help the Japanese economy recover from disaster.

"Investors should forget about yen strength," Mansoor Mohi-Uddin of UBS told the Financial Times here.

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