Citigroup: Closing of arbitrage trades may push the US dollar against the Japanese yen below 140.

Citigroup strategist warns of closing risk in yen carry trades, stating that changes in interest rate differentials and improvements in domestic conditions may trigger a yen appreciation beyond expectations. Strategists Osamu Takashima wrote in a report that while a significant closure of yen carry trades is "not our base case forecast," "we do not rule out the risk of hedging operations by domestic and foreign investors potentially pushing up the yen exchange rate." Over the past decade, Japanese investors have been steadily increasing overseas investments, believing that the ultra-low interest rate environment domestically will persist in the long term. With the rise in Japanese government bond yields, this trend may begin to reverse and could have an impact on the global financing environment. Citigroup points out that yen-denominated bonds as a portfolio hedging tool are becoming more attractive, especially in hedging global risk assets. The bank predicts that USD/JPY will fall below 145 by the end of the year; if there are closing trades in carry trades, this exchange rate could fall below 140.