Yuan to surge as yen carry trade goes awry

TOKYO – Chinese regulators are worried about the impact of a stronger yuan on exporters. Those fears might be validated soon as the so-called “yen carry trade” goes awry across global currency markets.

Ever since the Bank of Japan’s July 31 interest rate hike, the yen’s resulting surge has upended foreign exchange markets.

Twenty-five years of holding rates at zero turned Japan into the globe’s top creditor nation, where for decades investment funds borrowed cheaply in yen to bet on higher-yielding assets worldwide. It became one of the globe’s most crowded trades, one uniquely prone to correction where sudden moves in the yen slammed markets virtually everywhere.

The yen’s 6% rally over the last 22 days has put the yuan under considerable upward pressure. Just as the yen’s weakness earlier this year pulled the yuan down, its rally is pushing the yuan higher in ways Chinese President Xi Jinping might not appreciate.

So far this year, the People’s Bank of China has tried to keep the yuan from sliding too far. A weaker yuan would make it harder for Chinese property developers to honor payments on dollar and other foreign currency-denominated offshore bonds, raising China Evergrande Group-like default risks.

A weaker yuan that makes Chinese exports even more competitive might also irk Washington at the height of a raucous US election campaign in which both Republicans and Democrats have portrayed China as public enemy number one. A falling yuan might also set back Beijing’s efforts to increase trust in the yuan as a store of value and challenge the dollar.

Yet the degree to which the yuan now faces upward pressure may be irking Xi’s inner circle. And that anxiety might be about to intensify if economist Guan Tao, who