A lot of money was raised in Japan at 0% interest rates and used to speculate in equities in other parts of the world.
The “Yen carry trade” refers to investors borrowing money at near-zero interest rates in Japan, and then redeploying that cash into higher-yielding assets around the world, such as stocks and bonds.
Typically, the Japanese yen carry trade is where the cheap cash raised in Japan is redirected into higher-yielding US Treasury notes, with investors collecting the difference between the interest rates set by the Bank of Japan and the Federal Reserve. But, the yen carry trade had spilled over into other assets like stocks.
On Monday, the Bank of Japan unexpectedly raised interest rates 15 basis points last week amid the prospect of rate cuts by the Federal Reserve, the yen has strengthened. That’s sparked a wave of margin calls, leading to speculators unwinding their positions and selling stocks.
The equity market selloff was to a large extent attributable to the unwind of the yen carry trade.
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