Japan raises interest rates, testing the carry trade

The Bank of Japan raised interest rates in a rapid move designed to bring rates up to their highest levels in seven months. This aggressive strategy tests one of the most famous strategies on Wall Street: the carry trade. For years, the Bank kept Japanese interest rates extremely low or even negative while other countries, like the US, kept theirs much higher. Investors would borrow cheap yen and invest it elsewhere to profit from the difference. Now, Japan is increasing its rates quickly over the past seven months. This action puts pressure on investors who borrowed money at the historically low cost. They face a difficult choice: keep borrowing yen at those low rates while other currencies become more expensive, or stop the strategy and return home to take their losses.