Yen yorker: What is the 'yen carry trade’ that’s causing a global stock rout?
Mint looks at the reasons behind the global ‘stockocalypse’: Global markets were in a sea of red, led by Japan, where the benchmark Nikkei tumbled 12.40%, marking its largest one-day fall since ‘Black Monday’ in October 1987. The broader Topix index crashed 12.48%. Such was the intensity of the selloff that circuit breakers temporarily halted trading of futures for the Topix as well as the Nikkei 225.
Trading was also suspended for the Kospi and Kosdaq cash and futures markets in South Korea. European markets too retreated under selling pressure. In India, the Sensex crashed over 2,200 points, wiping off ₹15 trillion in investors’ wealth.
Experts attribute this to the unwinding of the yen carry trade. A carry trade is a widely popular trading strategy in which an investor borrows from a country with low interest rates and a weaker currency and invests the money in the assets of a country with a higher rate of return. The yen is one of the most widely used currencies for this purpose as Japan has been maintaining a zero-interest rate regime for over two decades.
The gush of funds from Japan has been a major source of liquidity for equity markets around the world. Last week, the Bank of Japan raised interest rates for the second time this year to 0.25%, apart from announcing a bond tapering plan. Additionally, it left the door open for further rate hikes this year.
This has led to the yen strengthening against the US dollar. A strong domestic currency coupled with rising interest rates in Japan is making the yen carry trade unprofitable for investors. Global markets are also fretting over the US tipping into recession after its unemployment rate spiked to 4.3%, stoking fears that the Federal Reserve has fallen behind the
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