Yen Carry Trade Unwinding

• 07 Aug 2024

On 5th August 2024, major global stock markets saw their steepest decline in decades, triggered by the unwinding of the yen carry trade, compounded by ongoing concerns over a potential US recession and geopolitical tensions in West Asia.

• Major stock markets experienced their most significant drop in decades, driven by a new global trigger: the unwinding of the yen carry trade.
• The yen carry trade involves borrowing in countries with low interest rates, like Japan, and investing in countries with higher rates, such as Brazil and India, to capitalize on interest rate differentials.
• Japan's Bank of Japan had kept interest rates at or below zero from 2011 to 2016 and further reduced them to -0.10% after 2016 to stimulate economic activity.
• Recent changes in Japan’s monetary policy, including a 35-basis point rate increase between mid-March and July, disrupted the carry trade and led to significant market adjustments.
• The July 31 rate hike of 25 basis points caused a swift unwinding of the yen carry trade, prompting investors to sell off assets held in foreign markets.
• This unwinding resulted in the yen strengthening against major currencies, including the US dollar, Brazilian real, Mexican peso, and Indian rupee.
• The rise in Japanese interest rates and the strengthening yen have created ripples across global markets, intensifying investor concerns about economic stability and market volatility.