Mohamed El-Erian, Chief Economic Advisor at Allianz, has called for a cautious unwinding of Japan's excessive 'carry trades' following recent dovish signals from the Bank of Japan. El-Erian highlighted the risks associated with the pro-risk approach adopted by the BoJ.
What Happened: El-Erian took to social media platform X to express his apprehensions about the BoJ's pro-risk approach. He highlighted the potential conflict between this approach and Japan's domestic economic needs.
El-Erian recommended "Rather than encourage markets to place new "carry trades," as it is this morning, it should be used as an opportunity to unwind the remaining excessive levels of such trade in a more orderly fashion."
"I suspect that the BoJ's pro-risk signal, which is partly due to external pressures, will eventually conflict with the country's domestic economic requirements," El-Erian wrote.
Back to above 147 per US dollar:
The Yen is currently trading 2% weaker on the day in response to dovish signals from the Bank of Japan.
Specifically, BoJ Deputy Governor Uchida noted that, due to "financial and capital markets at home and abroad being extremely volatile," he... pic.twitter.com/5Lg39G4jKa— Mohamed A. El-Erian (@elerianm) August 7, 2024
El-Erian highlighted that the Yen has weakened by 2% against the U.S. dollar, trading above 147 per dollar. This decline follows dovish signals from the BOJ.
El-Erian emphasized that financial stability ultimately hinges on economic stability.
Why It Matters: The concerns raised by El-Erian come amid a backdrop of significant economic events in Japan. Recently, Peter Schiff criticized the BoJ's decision to halt rate hikes, warning that inflation could severely impact Japan.
Additionally, the BoJ's policies have been blamed for a major selloff in global markets. Economist Jim Bianco attributed a sharp decline in global markets to the unwinding of the Japanese yen "carry trade," which began when Japan's central bank raised interest rates.
The yen "carry trade" involves borrowing yen at low interest rates and investing in higher-yielding assets elsewhere. This practice has been significantly impacted by the BoJ's recent decisions.
Arindam Sandilya, co-head of global FX strategy at JPMorgan, noted that the unwinding of these trades is only halfway done, suggesting further market volatility ahead.