USD/JPY: What Happens When the Interest Rate Spread Goes Negative?

This is not the first time in recent history that US interest rates have fallen below Japanese levels. In the past 40 years, this has happened at least 5 times. The most recent time was in 1993.

The following chart illustrates how USD/JPY performs whenever the interest rate spread between the US and Japan dips below zero. As you can see, it almost always precedes a sharp drop in USD/JPY that lasts can last for a number of months.



  1. Great chart!

    There is one thing that strikes me with the first time the spread is below 0.

    There is a huge drop in USDJPY from 300 to 200, that is happening while the spread is going up from -3 to 5. Can you explain that?


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  4. Carry trades only work when:
    1) central banks around the world are raising interest rates
    2) the volatility in the currency market is low
    3) there is strong risk appetite

    Until we return to an environment where any of the 3 qualifications are satisfied, carry trades will under perform.

    With that in mind however, USD/JPY is no longer a carry trade. BUT as I indicated in the post above when US rates fall below Japanese rates, we tend to see further USD/JPY weakness


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