Do we see any evidence of the Japanese Yen carry trade?

For the better part of this century, the Japanese Yen carry trade had a meaningful impact to the US equity market. However, over the last several years that has not been the case. That’s not to say that it is not happening. What I am saying is that its impact has been fairly muted. For the novice, a carry trade is one where you sell a low-yielding currency by borrowing it from a financial institution and immediately purchasing a high-yielding foreign currency. In the case of Japan that would mean borrowing Yen, then selling the Yen, and then purchasing Dollars to buy Dollar-denominated assets. When an abundance of Yen is sold to purchase Dollars the conversion factor (aka exchange rate) moves in a way that puts downward pressure in the Yen and upward pressure to the Dollar. The process is reverse when an abundance of Dollars are sold to purchase Yen.  

When the amount of Yen needed to purchase $1 is going up, the Yen is losing value vs. the Dollar. We say that the Yen has depreciated and the US dollar appreciated. On the other hand, when the amount of Yen to purchase $1 is going down, the Yen is gaining value vs. Dollar. In this scenario we say that the Yen has appreciated and the US dollar has depreciated. 

In the Yen carry trade we would expect to see a depreciation in the Yen-Dollar exchange rate (or an appreciation if looking at it from the dollar perspective). The converted Yen into dollars would normally go into higher-yielding assets, such as the S&P equity market, which would then give impetus to its rise. In other words, when the Dollar strengthens in relation to the Yen, we would expect to see an equity rally, and vice versa. As you can see, however, any profit made in the Dollar investment will be curtailed by any loses due to exchange rate fluctuations (i.e., Yen appreciating). 

What we see from the graph below, which shows both the JPY/USD exchange rate and the S&P 500 (both metrics indexed to March 2011 to aid comparison), is that from 2012 to 2016 as the Dollar appreciated (indexed JPY/USD goes up), the S&P increased in value; and when the Dollar depreciated (indexed JPY/USD went down), the S&P declined. However, after from 2017 onward there has been a decoupling from that previous trend. We now see that Yen-Dollar exchange rate impact to the S&P 500 has been less than obvious. This tells us that the carry trade has been less of an impact in driving the stock market upward, and as such, some other factors are driving the market’s move upward.

JPY/USD vs. S&P 500