As expectations rise that the Bank of Japan will raise interest rates at the monetary policy meeting scheduled for this week, attention is focusing on the possibility of a reoccurrence of the yen CARRY liquidation that triggered last August's 'Black Monday' incident. Experts project that, unlike last year, the scale of additional liquidation will not be large due to the continued strength of the dollar, yet they remain vigilant.
◇ BOJ may raise the benchmark rate to 0.5%
According to various foreign media reports on the 23rd, the market estimates an 80% probability that the Bank of Japan (BOJ) will raise the benchmark rate during the monetary policy meeting on the 23rd and 24th. Multiple Commissioners, including Governor Kazuo Ueda, are also indicating that the economy and price outlook align with expectations, bolstering the possibility of a rate hike.
If the Bank of Japan raises interest rates, it will be the first increase in six months since it raised the benchmark rate to 0.25% at the end of July last year. This will be the third interest rate hike since the termination of negative interest rates in March last year. The benchmark rate is expected to be 0.5%.
The last time the Bank of Japan raised interest rates, a global stock market crash occurred. This was due to the expectation of interest rate cuts in the U.S., while the Bank of Japan raised rates, narrowing the interest rate gap between the U.S. and Japan. This led to a liquidation of the 'yen CARRY trade,' where low-interest yen was borrowed to invest in high-interest currencies like the dollar. However, as the U.S. economy proved to be solid, the CARRY liquidation movement has subsided.
If the BOJ raises rates, the CARRY trade liquidation movement, which had taken a breather, could resume. According to the U.S. Commodity Futures Trading Commission (CFTC), the 'yen speculative net position,' which shows the scale of the yen CARRY trade, recorded a net selling of 29,400 contracts as of the 18th. Considering that it turned to net buying in August last year and led to a significant liquidation of the yen CARRY trade, the scale may have expanded again.
Some analysts suggest that up to 304 trillion won of yen CARRY funds could be liquidated. According to a report by the Bank of Korea's International Department published last August, the total yen CARRY fund balance was estimated at 506.6 trillion yen (approximately $34 billion, 4,708 trillion won) as of the end of March last year. The Bank of Korea analyzed that 6.5%, or 32.7 trillion yen (about 304 trillion won), could be liquidated.
◇ Likely not to result in large liquidation due to strong dollar… keenly observing the possibility of fund movement
Experts believe that the current market situation differs from that in July last year, so the likelihood of a CARRY trade liquidation is not high. Kwon Amin, a researcher at NH Investment & Securities, noted that "the emergence of CARRY trade liquidation in August last year was due to Japan raising rates contrary to market expectations while discussions on interest rate cuts were happening in the U.S." He added, "Currently, concerns over a strong dollar are increasing, making CARRY liquidation unlikely." This indicates that maintaining a high dollar value reduces the incentive to sell dollars and buy yen.
Kwon further explained, "During the Abenomics era, more than half of Japan's external assets were concentrated in stocks and bonds, but now they are focused on foreign direct investment (FDI), which means there aren't many assets to be liquidated." He said, "For meaningful CARRY liquidation to occur, Japanese investors would have to sell all their U.S. bonds and return to Japan, but this is not an easy situation."
Kim Chan-hee, a researcher at Shinhan Investment Corporation, said, "The possibility that the BOJ's interest rate hike will lead to yen CARRY liquidation seems low compared to last August," but added, "However, the heat of the Trump trade, which has intensified since last October, may diminish as a result of this." He further explained, "Even if there is no interest rate hike, I believe we have reached a point where the Trump trade could revert."
However, some point out that global investment funds may transfer due to the rise in yen value. Marcin Kazmierczak, Chief Operating Officer (COO) of the U.S. investment firm Redstone Oracle, stated to the cryptocurrency media outlet 'The Block' that, "The Bank of Japan's interest rate hike is likely to trigger yen CARRY trade liquidation again," adding that "this could dampen the heat of the Trump trade."
According to Jo Yong-gu, a researcher at Shinyoung Securities, "If the dollar-yen exchange rate, which had risen to the upper 150s, falls, some CARRY liquidation could occur, causing a movement of funds," adding, "Investments that had flowed into our country could also move back to Japan, so we need to be cautious."