[danielheath]

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.

[po]

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.

[brutus1213]

What happens if the JPY appreciates against USD? Do investors hedge this (I assume this incurs a cost) or do they do this "naked"?

[po]

If JPY appreciates against USD they don't make money or can even lose money. I'm sure there is some hedging going on, but I don't know for sure the mechanics of it all: https://www.thebalancemoney.com/yen-carry-trade-explained-pr...