Is the Yen Carry Trade About to Unwind?
During the first days of August 2024, the yen appreciated by approximately 13%. That helped trigger an abrupt unwind of the yen carry trade.
On August 5, the Nikkei Index plunged 12.4%, its worst one-day fall since 1987. When Wall Street opened, the Nasdaq fell 6.3%, Nvidia opened 14% lower and the VIX approached 66.
Markets recovered quickly. Nevertheless, the episode demonstrated how a sudden rise in the yen could destabilize financial markets around the world.
Today, similar conditions are developing again.
The yen recently approached ¥164 per dollar, prompting Japan and the US to intervene jointly to strengthen it.
Meanwhile, the Bank of Japan is continuing to tighten monetary policy. Japanese interest rates are rising, the BOJ is reducing its purchases of Japanese Government Bonds and its balance sheet and the monetary base are contracting.
If US interest rates fall while Japanese rates continue rising, the interest-rate differential could narrow rapidly. The yen could then strengthen sharply, once again forcing yen-funded carry trades to unwind and inflicting very heavy losses across numerous asset classes around the world.
This new Macro Watch video explains:
- How Japanese monetary policy has evolved since 2018.
- How the BOJ responded to COVID by dramatically expanding its lending and balance sheet.
- Why rising inflation eventually placed Yield Curve Control under enormous pressure.
- How the BOJ began reversing decades of radical monetary easing in 2024.
- How that reversal helped trigger the August 2024 global market shock.
- Why the yen carry trade is becoming increasingly vulnerable again.
Japan has served as the world’s monetary-policy laboratory for more than 25 years. Its policies have shaped interest rates, exchange rates and asset prices far beyond Japan.
Now, as the BOJ attempts to unwind decades of radical monetary easing, Japan could once again become the epicenter of a global financial-market shock.
This is a risk that Macro Watch subscribers should be watching very closely.
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