Japan: the last carry trade.

• Position: OFF THE NEWS - Brief Article

For years private global financial institutions, particularly the hedge funds, took advantage of the so-called "carry trade." With U.S. short-term interest rates at extraordinary lows (at one point the Fed funds rate was set at 1 percent), financial institutions would borrow on the short end of the yield curve and buy the long end, guaranteeing a nice profit even before taking any risk. The carry trade served as a kind of turbo charger for the financial markets, a process which has come to an end as the Federal Reserve raised short-term rates to over 4 percent while long-term rates have failed to rise by a proportional amount comparatively, flattening the so-called yield curve.

The one exception: Japan. The discovery by global hedge funds earlier this year of the yen carry trade is likely to keep downward...