Yen carry trade back on radar after Takaichi jolts markets

TOKYO - A once-popular currency trade betting against the yen looks set to make a comeback, as Ms Sanae Takaichi's near-certain elevation to Japan's premiership raises the prospect of slower interest-rate hikes.

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Japan's currency dropped against all of its major peers on Oct 6, as investors wagered that Ms Takaichi's pro-stimulus stance would result in a slower timeline for the Bank of Japan's (BOJ) policy tightening.

Delayed hikes could well tempt traders back into a strategy known as the carry trade, where they borrow the low-yielding yen and buy currencies such as the Brazilian real or Australian dollar that offer higher returns.

"The market is likely to conclude that the yen carry trade is back on" in the short term, said Ms Jane Foley, head of foreign exchange strategy at Rabobank.

The election outcome sent the yen tanking as much as 2 per cent against the US dollar on Oct 6, while bonds slumped on concern Ms Takaichi will unleash more government spending and fan inflation. Many market players note too that she has previously criticised the BOJ's moves to raise interest rates, and could advocate slower policy tightening if she takes office.

Mr Etsuro Honda, who advises Ms Takaichi on economic policies, said a move by the BOJ to raise interest rates in October would likely come too soon after the formation of her administration and would be better timed in December.