The 2024 Yen Carry Unwind

For most of the 2010s and early 2020s, Japan kept interest rates near zero while the US and other economies raised rates sharply, making the yen carry trade — borrowing yen at almost no cost, converting it to dollars or other currencies, and investing the proceeds in higher-yielding assets abroad — reliably profitable for years. The trade only loses money in one of two ways: if the yen strengthens sharply against the currency you invested in, or if Japanese rates rise, both of which make the borrowed yen more expensive to repay.

Both happened at once

On July 31, 2024, the Bank of Japan raised its policy rate and signaled it intended to keep tightening, ending markets' assumption that Japanese rates would stay near zero indefinitely. Days later, a weaker-than-expected US jobs report on August 2 raised fears of a US recession and expectations that the Federal Reserve would cut rates faster than planned — narrowing the interest-rate gap between the US and Japan from both directions simultaneously. The yen strengthened rapidly against the dollar, and every carry trader funding a position with borrowed yen was suddenly facing losses on the currency leg on top of a shrinking rate advantage, which meant unwinding the trade (selling the foreign asset, buying back yen to repay the loan) all at once became the rational move for everyone holding it.

The unwind

On August 5, 2024, Japan's Nikkei 225 index fell over 12% in a single day — its worst one-day drop since the 1987 Black Monday crash — as investors who had funded Japanese and international equity positions with yen borrowing sold to raise yen and repay loans. Global markets, including US tech stocks that had been popular destinations for carry-funded money, fell sharply in sympathy over the same days, before markets stabilized once the Bank of Japan signaled it would slow further rate hikes.