A spread on interest rates means you can e.g. borrow some JPY at 2% interest, spend it to purchase USD, then loan the USD to someone else at 6% interest.
After you pay back the 2% interest to the original lender, you're left with 4% as profit.
This usually happens when one government pushes banks for lower interest rates (to stimulate the domestic economy).
It creates a large volume of trades buying USD with JPY, and by doing so causes the JPY currency to become less valuable relative to USD.
This is exactly right, and also demonstrates why the Japan is in a bind.
They don't mind the currency going low as it helps exports but going too low, too fast is a problem. Increasing interest rates to narrow the spread will affect the economy. So they are walking a very tight line here between JPY/USD spreads and domestic economy/interest rates. All global economies are to some extent but since JPY is trusted and has had low interest rates for decades, it's popular within the finance industry for this kind of trade.
It’s not a risk-free trade. Borrowing yen and buying dollars is effectively shorting the yen (relative to the US dollar). The investors who did this before made money because the yen dropped, but maybe they will want to take profits, which would tend to strengthen the yen.
Borrowing yen now to buy dollars is sort of like shorting a stock when the price already dropped. The interest rate difference makes it a cheaper bet, but it’s still a bet and could go bad if the yen strengthens.
In the early 1980s, a couple of Australian banks took advantage of very low Swiss interest rates to offer a series of apparently cheap loans to small businesses and farmers, with the catch being that the loans were of course denominated in Swiss francs.
Within a few years, those borrowers (whose income was naturally denominated in Australian dollars) got a very painful lesson in that risk, when the exchange rate between the Australian dollar and the Swiss franc moved significantly, putting them very much underwater on those loans.
(This became known as the "Swiss loans affair", with allegations that the banks in question had in many cases not adequately informed the borrowers of the risk).
As a retail investor, you can do Forex trading or you could do time deposits at a Japanese bank (assuming you live here). SMBC Prestia is offering 6.5% on it right now for example:
After you pay back the 2% interest to the original lender, you're left with 4% as profit.
This usually happens when one government pushes banks for lower interest rates (to stimulate the domestic economy).
It creates a large volume of trades buying USD with JPY, and by doing so causes the JPY currency to become less valuable relative to USD.