The negative interest rate environment in Japan coupled with depressed rates around the world has created an unprecedented investment dynamic among Japanese investors. According to Federal Reserve Bank of San Francisco analyst Sean Creehan, more and more Japanese investors are choosing to make foreign investments directly in borrowed foreign currency.

“Typically, Japanese institutional investors have funded their overseas investment with yen and exchanged them for dollars using long-term cross-currency swaps,” Creehan explained in a new blog post.

However, lately, the amount of debt issued by Japanese firms has skyrocketed. As of early June, Japanese firms had issued $52.6 billion in debt in 2016. That’s roughly 50 percent more than last year’s pace.

Why are Japanese lenders opting to invest by borrowing in foreign currency? The combination of increasing costs related to currency hedging and historically low global interest rates means…

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