Depending on who you ask, the yen carry trade is either alive and well, or an overused parlance in the investment community.

What is a carry trade anyway?

A carry trade is an investment strategy in which an investor borrows money at a low interest rate in order to invest in assets they speculate will generate a greater return. This strategy is very common in the foreign exchange market and works especially well if asset prices are stable and the currencies involved do not move against the investor. Adding to the fun, many investment houses will ramp up their returns by using additional leverage. The return can be quite impressive if the currency borrowed remains stable or continues to depreciate against the currency used to purchase the investment.

So how does the “yen carry trade” work? In a nutshell:

Whether one thinks this investment strategy is widely used or not, we can assure you that investors (especially U.S. based investors) should care which direction the yen moves. Why? Correlation. The yen has an impressively high negative correlation to U.S. equity prices (today, we'll use the S&P500 in our examples). And for our statisticians out there, we know that correlation doesn't mean causation, but it does have implication. For many years now, the correlation between the yen and S&P 500 (SPY) has been -0.9 to -1.0. Meaning, whichever direction one goes, the other goes equally the other direction. So as investors, we should definitely care which direction the yen is heading. If it is dropping in value, that is a positive for the S&P 500 while an increase in yen value means trouble for the S&P 500.