Shockwaves from Japan had a message for investors in India

livemint.com:

₹15 trillion was wiped out in a single day, even as the volatility index shot up 60%. Like Chaos Theory, at first it looked as if a little flap in the US over a fast-weakening jobs market—and hence recession risk—had triggered a market quake in Japan, with tremors felt everywhere else. The web of causes and effects that shook stock indices, however, isn’t all that hard to explain.

It serves as a reminder, all the same, that we inhabit a world that is far too financialized, interlinked and complex for us to track closely enough. It’s a sign of the times that the hardest impact of US payroll data was on the other side of the globe. It was taken as a doom signal for the yen carry trade, which involves cheap loans taken in Japanese currency to invest in high-yielding assets elsewhere.

The Bank of Japan (BoJ) had just raised its policy rate to 0.25% after having held it close to zero for decades, and if the US Federal Reserve were pushed into a big rate cut to fend off an economic slump, that game of yield arbitrage would end up in a pincer squeeze of rates. A rising yen brought on by the BoJ’s rate hike would’ve worsened losses for Japanese investors, who had invested enormous sums globally and risked getting that much less back upon conversion into their own money. A sudden unwinding of rate-gap-reliant bets followed.

Meanwhile, a stronger yen rattled Japanese stock prices directly too. After all, Japan’s big businesses are mostly export champions and their run of competitive exports and large profits on the back of a weak yen was suddenly drawing to an end. Rarely have we seen such a drastic re-rating of prospective earnings.