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TOKYO: At a time when global stock markets are tumbling and most currencies plunging, one currency has drawn concern by rising too much - the Japanese yen.
The yen is up against most major currencies, surging as much as 10 percent against the dollar last week alone.
On Friday, it briefly hit a 13-year high, with the dollar falling to ¥90.87, though it traded late Monday around ¥93.86 - helped perhaps by a statement from the Group of 7 finance ministers expressing concern about recent “excessive volatility” in the yen exchange rate.
The gains in the yen have helped batter Tokyo's beleaguered stock market, where prices fell to a 26-year low  Monday.
Partly, the recent strength of the Japanese currency comes as investors move money into the relative haven of Japan, the world's No.2 economy after the United States, which faces recession but whose banking system has limited exposure to the U.S. mortgage crisis. But currency analysts say most of the yen's recent gains stem from a different reason: the end of one of the world's largest easy-money plays, the so-called yen carry trade.
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For much of this decade, Japanese and foreigners alike borrowed money in Japan, where interest rates were very low, to invest in higher yielding assets across the world, from home loans in Budapest and Seoul to equities in Mumbai.
This turned Japan, with its $15 trillion in personal savings built up by the nation's chronic trade surpluses, into a provider of low-cost capital for the rest of the world.
No one knows for sure how large this outflow of yen was. Much of it took place beyond public scrutiny, in the form of currency options or other types of derivative trading. Most analysts agree its size was in the hundreds of billions of dollars, with some estimating it reached well over half a trillion dollars. As the yen carry trade grew, currency analysts warned that it was a bubble of cheap global credit, which one day would burst.
Now that day has come, say currency analysts and economists.
Investors have been unwinding yen-based loans as part of a panicked flight from risky assets and into havens like the yen and the dollar, which is also up against the euro and the pound. The prospect of global recession has also led central banks in many countries to cut interest rates, reducing the appeal of borrowing in Japan.
The result has been a huge reversal in the flow of money, back into Japan and its currency.
“This is the end of the yen carry trade and the yen bubble,” said Tohru Sasaki, chief exchange strategist in the Tokyo office of JPMorgan Chase. “The yen is coming back home.”
The end of the yen carry trade could have serious consequences, economists say.
In Japan, the higher yen has worsened the already darkening outlook for the nation's export-driven economy, hurting companies like Toyota and Sony by making Japanese goods more expensive abroad and reducing the value of overseas profits when converted into yen. The yen, and the prospect of a recession in important markets like the United States, have helped drive the benchmark Nikkei 225 stock average down about 50 percent so far this year.
Globally, the demise of the carry trade could contribute to an overall increase in borrowing costs, especially for developing countries and lesser known companies in developed countries, by cutting off a crucial source of low-cost capital, economists say.
“The unwinding of the yen carry trade is just one more way of taking excess credit out of the system,” said John Richards, head of Asia research at the Royal Bank of Scotland's Tokyo office. “Higher borrowing costs will go up disproportionately for riskier investments.”
As this money flows back into Japan, currency analysts expect the yen to keep gaining. Sasaki says his company's forecast is ¥87 to the dollar, but it could go as high as ¥80.
Sasaki said the size of the yen's rise in recent weeks suggested that at least several trillion yen, or tens of billions of dollars, had flowed back to Japan. He said the last time he had tried to calculate the size of the entire yen carry trade was three years ago, when he estimated it totaled ¥40 trillion. He said it could have easily grown much larger than that in recent years.
All this money from Japan added to excessive abundance of inexpensive capital that many economists now blame for causing the current financial crisis. Some of the biggest players in the carry trade were U.S. and European hedge funds and banks.