The 2024 Yen Carry Unwind Panic — The Shock of the Nikkei Falling -12% in a Day

Japan long kept interest rates near zero. So investors borrowed yen at cheap interest and invested it in higher-rate assets such as in the United States, aiming to earn the interest rate difference. This is called the 'yen carry trade.'

This strategy works well while the yen stays weak. But if the yen suddenly strengthens, the cost of repaying the borrowed yen rises, producing losses and forcing a hasty unwinding (liquidation) of positions.

On July 31, 2024, the Bank of Japan raised its benchmark rate from 0–0.1% to 0.25%. On top of that, U.S. employment data released on August 2 came in weaker than expected, raising expectations of U.S. rate cuts, and the view spread that the interest rate gap between the U.S. and Japan would narrow.

The yen then surged (appreciating about 6% from July 29 to August 5), and yen carry positions were unwound all at once. On August 5, Japan's Nikkei 225 index plunged more than -12% in a single day, the largest drawdown since 1987, and this shock spread to U.S. and European markets, wiping out more than $670 billion in market capitalization worldwide in a single day.

The yen carry trade is a strategy that combines 'borrowed money (leverage)' and 'FX risk.' It earns steadily in normal times, but the moment FX shifts sharply, many investors rush to unwind at once and can shake the entire market.

The implication for individual investors is that when investing in overseas assets, exchange rates can greatly change your returns. Especially if you take on FX risk on top of borrowed money, losses can grow rapidly amid unexpected swings.