We can talk about the carry trade all we want, but this picture does a pretty good job explaining the relationship.
The relationship flows in several directions:
- An increase in the value of the yen puts pressure on the carry trade, moving the stock market downward as traders unwind positions
- A decrease in the value of the stock market puts upward pressure on the value of the Yen for the same reason
- An increase in the value of the stock market makes it more appealing to speculate via carry trade, putting upward pressure on the dollar as traders finance positions with cheaper Yen
- A decrease in the value of the Yen makes profits for the carry trade, putting upward pressure the value of the stock market.