Carry Trades Seen Returning as Yen Borrowing Hits 7-Year High

Outstanding inter-office lending by foreign banks in Japan surged to a seven-year high in May, suggesting demand for carry trades funded by yen may be reviving.

Such transactions soared 15 percent in May to 11 trillion yen ($89 billion), the biggest monthly increase since 2011, according to Bank of Japan data. The outstanding balance is the highest since 2008, the data show.

The increase came as the Japanese currency weakened 3.8 percent against the dollar in May, the most since November. The growing lending indicates carry trades funded with yen borrowing may be on the rise, said Kengo Suzuki, chief currency strategist at Mizuho Securities Co. in Tokyo.

“I expect such trades to expand, considering the Greece turmoil and risk of China’s economic bubble are coming to an end,” Suzuki said.

The yen’s volatility is lower than that of the euro, making the Japanese currency a better funding source, Suzuki said.

Implied three-month volatility for the dollar-yen is the lowest among G-10 currencies after pound-dollar.

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