Seth’s posterous

Abstract
Yen carry trades have traditionally been viewed in narrow terms purely
as a foreign exchange transaction. We argue that the carry trade should instead be viewed in the broader context of global credit conditions. We show that the volume of Yen funding that is channeled for use outside Japan is mirrored by fluctuations in the size of US broker-dealer balance sheets. Differences in short-term interest rates across currencies help to explain the incidence of the carry trade, as does the measure of implied equity risk given by the VIX index. The conjunction of deteriorating credit conditions in the US and the weakness of the US Dollar against the Yen in the early stages of the credit crisis of 2007/8 can thus be seen as two sides of the same coin. Both can be seen as consequences of nancial sector deleveraging in
the US.