From the archiveCase study · Aug 20245 min read
The yen carry unwind that crashed Tokyo
After a month-long yen rally, a small Bank of Japan rate hike and a weak US jobs report forced a global exit from yen-funded bets, crashing the Nikkei 12.4% in a day, its worst since 1987, and sending the VIX to 65.
A small Bank of Japan rate hike and a weak US jobs report forced a global exit from yen-funded bets: on 5 August 2024 the Nikkei fell 12.4%, its worst day since 1987.
Assets with little in common fell together because the same leveraged investors owned them, while the yen soared and the VIX spiked to 65.7 before the US open.
The Nikkei rebounded 10.2% the next day, on 7 August the BoJ ruled out hikes while markets were unstable, and the S&P 500 recovered its early-August losses within two weeks.
The trader’s angle
How crowded, leveraged positioning turns modest news into a cross-asset crash, and why central banks step back when markets break.
Nikkei 225, 5 Aug
-12.4%
down-4,451 pointsIts worst day since Black Monday in 1987 and its biggest points fall ever. The broader Topix lost 12.2%.
USD/JPY, 5 Aug low
141.7
downfrom nearly 162 in early JulyA 20-yen fall in about a month as the yen rebounded from a 38-year low and carry traders bought back what they had borrowed.
VIX, pre-market peak
65.7
upclosed at 38.6Its biggest one-day spike on record, up from 23.4 on Friday, and exaggerated by thin options quotes before the US open.
US unemployment, July
4.3%
upSahm rule triggeredThe highest since October 2021. Payrolls rose just 114,000, against roughly 175,000 expected.
In a you borrow a currency with low interest rates and invest the money somewhere that pays more. For years the yen was the world’s favourite : Japan only ended in March 2024, while US rates sat above 5%. Borrow yen at close to nothing, buy dollar assets yielding 5%, pocket the gap.
The catch is currency risk. You owe yen, so if the yen strengthens, your debt grows. A few days of sharp yen gains can wipe out a year of interest income. And when the funding currency jumps, carry traders rush to buy it back to repay their loans, pushing it higher still.
What happened
On Wednesday 31 July 2024 the Bank of Japan raised its to 0.25%, its highest since 2008. It also set out a plan to its government bond purchases to roughly half their previous pace by early 2026. Governor Kazuo Ueda said 0.5% would be no ceiling for rates. The same day in Washington, Fed chair Jerome Powell said a US rate cut could be on the table as soon as September.
On Friday 2 August, US rose just 114,000 and unemployment jumped to 4.3%, triggering the , a classic recession warning. Tokyo opened on Monday 5 August into a rout: the Nikkei 225 fell 12.4%, its worst day since 1987.
The yen surged to about 141.7 per dollar, from nearly 162 in early July: fewer yen per dollar means a stronger yen. Before the US open the spiked to 65.7; the S&P 500 then fell 3%, its worst day since 2022.
Why it happened
The fuel was a huge . With Japanese rates near zero and US rates above 5%, investors borrowed yen to buy higher-yielding assets around the world, from equities to the Mexican peso. At the end of June, leveraged funds held their biggest bet against the yen since 2007. The Bank for International Settlements (BIS) later put yen carry trades at roughly ¥40 trillion ($250bn) going into August.
Two modest shocks pointed the same way: a narrower gap between US and Japanese interest rates. A BoJ pushed one end up; a cooling US jobs market meant faster Fed cuts, pulling the other end down. As the yen rose, carry positions lost money and arrived. Traders bought back yen to repay their loans and sold whatever the loans had paid for, which pushed the yen higher still. A feedback loop of .
How it ripples through markets
From a small hike to a global unwind
- 1
BoJ hikes, Fed signals cuts
downUSD/JPYOn 31 July the rate gap that made yen borrowing so profitable is suddenly expected to narrow from both ends, and the yen strengthens as the dollar’s advantage shrinks.
- 2
Weak US jobs data
downUS Treasury yields114,000 payrolls and a Sahm rule trigger fuel bets on faster Fed cuts, pulling US yields down and narrowing the gap further.
- 3
Carry trades start losing money
A rising yen inflates what borrowers owe; margin calls arrive and risk limits are hit.
- 4
Forced selling everywhere
downNikkei 225To repay yen loans, leveraged investors sell what they bought: Japanese stocks, high-yielding currencies, equities worldwide.
- 5
Volatility explodes
upVIXThin pre-market options trading sends the VIX to 65.7. Higher volatility brings higher margin requirements, which force yet more selling.
- 6
The BoJ steps back
upUSD/JPYOn 7 August Uchida rules out hikes while markets are unstable. The rate gap stops narrowing, the yen weakens and the unwind loses its fuel.
Why it mattered for traders
This was correlated deleveraging: assets with little in common fell together because the same leveraged investors owned them. Japanese stocks, the Mexican peso (down as much as 5.4% in a day) and the Nasdaq all slid, while the yen, the one thing carry traders were short, soared. In a unwind, diversification can vanish exactly when you need it.
It also showed that a fear gauge can overshoot. The VIX is calculated from options quotes, not trades. Before the US open, S&P 500 options volume was about 80 times thinner than in normal hours, and widened their quotes to protect themselves.
The result was a print of 65.7. In regular trading the VIX peaked at about 56 and closed at 38.6. An extreme reading in illiquid hours measures panic and thin markets, not value.
What happened next
The panic burned out fast. The Nikkei jumped 10.2% on 6 August, its biggest points gain ever, helped by firmer US services data. On 7 August, BoJ deputy governor Shinichi Uchida said the bank would keep easing in place for now and would not raise rates while markets were unstable. The yen weakened back above 147 per dollar.
The Fed did not make the emergency cut some commentators demanded; it cut by half a point at its next meeting, on 18 September. The VIX was back below 15 by 16 August, and the S&P 500 had recovered its early-August losses within two weeks. The BoJ waited until January 2025 to hike again, to 0.5%. The BIS concluded that the unwinding of leveraged trades, and higher margins, had amplified a modest US data surprise into a global shock.
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Sources
- Bank of Japan — Change in the guideline for market operations (31 July 2024)
- US Bureau of Labor Statistics — The Employment Situation: July 2024
- Bank of Japan — Speech by Deputy Governor Uchida in Hakodate: Japan's Economy and Monetary Policy
- Bank for International Settlements — The market turbulence and carry trade unwind of August 2024 (BIS Bulletin No 90)
- Bank for International Settlements — Anatomy of the VIX spike in August 2024 (BIS Bulletin No 95)
An original summary written from the sources above. Figures are rounded; follow the links for the full record.
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