Strategists at Morgan Stanley believe the recent sharp appreciation of the yen is unlikely to disrupt the popular carry trade in emerging markets. A team led by James Head of Global FX and Emerging Markets Strategy wrote in a report that such trades should be resilient enough to withstand the impact of a stronger yen, provided no other factors push up overall market volatility.

They noted that for carry trades, what matters more is the change in overall FX market volatility, the outlook for global economic growth and equity markets, as well as whether emerging economies themselves possess attractive fundamentals. The strategists stated that global growth, the performance of global stock markets, and trends driven by individual fundamentals across major emerging markets have a greater influence on carry trade performance than the yen's movements.

On this basis, they remain optimistic, pointing to signs of resilience that are already emerging. Since July 29, the Brazilian real and the Colombian peso have depreciated against the yen by 5.1% and 3.4%, respectively, while strengthening against the U.S. dollar by 0.7% and 2.4% over the same period. As traders increased bets on a Bank of Japan rate hike and remained alert to potential official intervention to shore up the currency, the yen surged to 152.89 against the dollar on Tuesday, its strongest level since mid-February. The yen has since pared some of those gains.