Unpacking The Yen Carry Trade

Yen carry trade, a popular investment strategy that many investment firms use, suddenly goes distorted on 5 August 2024. What is the yen carry trade, and what happened behind the scenes that ultimately led to the market crash on 5 August 2024.

Yen carry trade is a trading strategy where investors borrow Japan’s cheap currency to invest in countries offering higher yields. The Japanese Yen has been one of the most lucrative currencies to enable this strategy due to the Bank of Japan’s (BOJ) zero-rate regime. According to DL news, the yen carry trade is estimated to be roughly $764 billion, yet this figure is likely to be significantly underestimated due to large gaps in the data acquired (DL News, 2024).

On 31st July 2024, the Bank of Japan decided to raise its short term policy rate to 0.25% from 0-0.1%, which has been the highest since 2008, known as the Lost Decade (Vantage, 2024). This policy change from the Bank of Japan led to a series of chain reactions that led to the market crash on 5 August 2024.

Due to BOJ rate hikes, investors implementing the yen carry trade saw that deleveraging is the best course of action. On top of that, the labor market data that was released from the US was disappointing which further deteriorated the confidence of investors in the US stock market. As such, these factors amplified the sentiment to reduce their leveraged position in equities and their forex trading (BIS, 2024).

With all being said and done, the brewing storm finally hit the stock markets. On 5 August 2024, a total of $907 billion was wiped off from Nasdaq’s total market value. Some of the most noticeable sectors would be the tech industry. Nvidia closed the day with a net loss of $168 billion, indicating a 6.4% fall. Apple and Amazon saw a reduction of its market cap by $162 billion and $72 billion respectively. Meta, Microsoft, Alphabet, Tesla and the aforementioned companies, collectively known as the “Magnificent Seven”, had a combined loss of $995 billion during the early moments of trading (Vantage, 2024). These are clear signs that, due to interest hikes from the BOJ, bets made of a cheap yen, many of which have funded purchases of asset classes with better returns less profitable, and thus unwinding these trades and urged deleveraging (Reuters, 2024).

Not only did this event highlight the fragility of the economy, it also reminded us of the interalliance of the global financial markets. Thus, vigilance and adaptability is crucial for navigating through the complexities of the global market.                                            

Written by:

Lee Yuan Jun

1st Year Student at Taylor's University,

Bachelor of Business (Honours) in Finance and Economics

References: 

DL News (2024), ‘How Big is the Yen Carry Trade — and why it matters to crypto’, 31 August 2024 [Online]. Available at: How big is the yen carry trade — and why it matters to crypto – DL News (Accessed at: 9 October 2024)

Vantage (2024), ‘Crisis on Wall Street: Inside The Turbulent August 2024 Market Crash’, 6 August 2024 [Online]. Available at: Crisis on Wall Street: Inside the Turbulent August 2024 Market Crash | Vantage Markets (vtg-mkt.com) (Accessed at: 9 october 2024)

BIS (2024), ‘The Market Turbulence and Carry Trade Unwind of August 2024’, 27 August 2024 [Online]. Available at: The market turbulence and carry trade unwind of August 2024 (bis.org) (Accessed at: 9 October 2024)

Reuters (2024), ‘Markets give off ‘Black Monday’ vibes as stock tank’, 5 August 2024 [Online]. Available at: Markets give off 'Black Monday' vibes as stocks tank | Reuters (Accessed at: 9 October 2024)