The carry trade, portfolio diversification, and the adjustment of the Japanese yen

Arbeitspapier

In this paper, the author considers whether fundamentals or other factors can explain the yen's ongoing weakness. In particular, the importance of capital outflows due to the carry trade and longer-term portfolio investment outflows, which may be delaying the adjustment of the yen, are investigated. A simple portfolio model is developed, composed of a speculative component and a minimum variance portfolio, to address the underlying motivation for capital outflows from Japan over the past ten years. The author's main findings suggest that a substantial portion of outflows may be attributed to diversification. Furthermore, given that considerable home bias remains in Japanese households' portfolios, the results suggest that capital outflows from households, largely driven by diversification, may continue to dampen a long-run appreciation of the yen going forward. That said, evidence of substantial speculative outflows, through carry trades, complicates the outlook for the yen.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Discussion Paper ; No. 2008-2

Classification and Topics

• Classification: Wirtschaft ; International Investment; Long-term Capital Movements ; Foreign Exchange ; Current Account Adjustment; Short-term Capital Movements ; Portfolio Choice; Investment Decisions
• Subject: Exchange rates ; International topics ; Recent economic and financial developments ; Kapitalexport ; Portfolio-Investition ; Währung ; Abwertung ; Yen ; Japan

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Winters, Corinne
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2008

Further information

• DOI: doi:10.34989/sdp-2008-2
• Handle: http://hdl.handle.net/10419/66907
• Last update: 10.03.2025, 11:43 AM CET