Just using interest rate parity.
Before the interest hike cycle, in early 2022, 1 dollar = 115 yen.
To make it simple, assuming USD interest rate is 5% and JPY is 0%.
If you exchanged 115 Yen [$1 worth of JPY] for USD and held USD for for 3 years, you should get $1.05^3.
If you hold Yen for 3 years, you shall have 115 Yen. So 115 Yen = 1.05^3 USD
1 USD = 99 Yen…
Real life is not like that.
In the real world, people exchange JPY for USD to earn higher yield, which created demand in the short-term.
That portion of USD can be deployed in the equity market, buying S&P 500 for example.
In this case, if you borrow Yen, you pay very little cost of capital (near zero), and you earned S&P 500 return.
Meanwhile, as everyone wants to do this kind of trade, and due to this imbalanced demand in the short term, USD will appreciate against JPY << this means you earn extra return when exchanging USD back to JPY (1USD = ~160JPY a few weeks ago, vs the 115 exchange rate 3 years ago).
In sum, you get S&P 500 return, you get USD appreciation return (~40% in 3 years), and you pay only JPY interest rate.
This is crazy.
Why would this happen? against the interest rate parity?
The other side of the trade seems to be those who are bearing the low rate of return on JPY… The savers in Japan I shall say.
this is also happening again in China?
The victims are obvious.. savers who are only paid 2-3% in China.