What is Yen Cary Trade?

Yen carry trade:

Why in news ? Global equity markets experienced a severe downturn starting on Aug 05, causing significant declines in major markets from Tokyo to London. Japan’s Nikkei had its largest single-day drop since 1987, indicating a major systemic issue.

What Happened on August 05, 2024?

• On August 05, 2024, markets took a sharp dive. The Nikkei index dropped by 12.40% and the Topix index by 12.48%, leading to trading halts. European and Indian markets also fell, with India’s Sensex losing over 2,200 points, wiping out around ₹15 trillion in wealth.

What Caused the Meltdown?

• The main reason for this market collapse was the unwinding of the yen carry trade. This trading strategy involves borrowing money in Japan, where interest rates are low, and investing it in other countries with higher returns.
• As Japan started raising interest rates, this trade became less profitable.

Why is the Yen Carry Trade Unraveling Now?

• The Bank of Japan increased interest rates to 0.25% and announced plans to reduce its bond-buying program, strengthening the yen against the US dollar. This change made the yen carry trade less attractive, causing investors to sell off their positions quickly.

Are there other contributing factors?

• Other factors adding to the market instability included fears of a potential US recession, marked by rising unemployment to 4.3%, and geopolitical tensions, particularly concerns about a possible conflict involving Iran.