JPY remains the preferred funding currency for Latin American arbitrage/carry
trades despite a sharp BRL/JPY drop after Lula’s re-election. Other regional
currencies — CLP, COP and MXN — have firmed, indicating sustained demand for
LatAm assets as destinations for yen-funded flows. Standard Chartered’s Tokyo
head of Japan financial markets said the arbitrage dynamic is intact, BRL
trading in Asian hours is relatively limited and Japanese investors have not
built large BRL positions, suggesting spillovers to Japan should be manageable.
Borrowing JPY to buy LatAm assets typically benefits from higher local rates,
but pronounced currency depreciation can materially erode returns.
