The Yen Carry Trade Unwind of August 2024 Explained

The yen carry trade unwind was a rush, in late July and early August 2024, to close trades that had borrowed cheap Japanese yen to buy higher-yielding assets around the world. After the Bank of Japan raised interest rates and weak US jobs data hit the dollar, the yen jumped, the losses on those trades multiplied, and investors sold everything from Japanese shares to US tech stocks and Mexican pesos to repay yen. On 5 August the Nikkei 225 fell 12.4%, its biggest one-day points drop on record, and Wall Street's "fear gauge", the VIX, briefly spiked to around 65.

Markets recovered within weeks, but the episode is now a textbook example of how a crowded, leveraged trade can unwind all at once.

What the carry trade was

For years Japan kept interest rates at or below zero while the US and other countries raised theirs sharply from 2022. That gap made it very cheap to borrow in yen and very rewarding to put the money somewhere else. Hedge funds, banks and individual traders sold yen to buy dollars, Mexican pesos, US shares and many other assets, earning the interest difference and often a rising asset price too.

The trade also pushed the yen itself lower, which made it look even safer: as long as the yen kept weakening, borrowers paid back less than they borrowed. By July 2024 USD/JPY had reached about 161.9, the weakest level for the yen since 1986, and Japan's Ministry of Finance was spending billions to support its currency. Our guide to Mrs Watanabe and Japan's retail traders explains how individual Japanese investors joined in.

How it unravelled

The Bank of Japan's decision on 31 July narrowed the interest gap from one side, and its signal of further hikes suggested the gap would keep narrowing. Two days later a weaker than expected US jobs report raised bets that the Federal Reserve would cut rates quickly, narrowing the gap from the other side. Both changes made the yen stronger, and a stronger yen meant losses for anyone short yen.

Because many positions were leveraged, the losses triggered margin calls. Traders had to buy back yen to cover, which pushed the yen higher still, which caused more margin calls. To raise cash, investors also sold assets that had nothing obvious to do with Japan, including US technology shares, cryptocurrencies and emerging-market currencies.

Monday 5 August

Asia opened first and took the full force. The Nikkei 225 fell 12.4% in a single session, its largest points drop ever, and trading was briefly halted in some futures. South Korea and Taiwan also tumbled. When Europe and the US opened, the selling spread: the VIX, which measures expected volatility in US shares, briefly hit about 65, one of its highest readings on record outside 2008 and 2020.

Then it stopped. On 7 August Bank of Japan Deputy Governor Shinichi Uchida said the bank would not raise rates while markets were unstable. The yen eased, Japanese shares recovered much of their loss, and within weeks most markets were back near their earlier levels. Later, the Bank for International Settlements published a study of the episode describing the yen as the predominant funding currency for carry trades and the unwind as a classic case of crowded positioning.

Why the move was so violent

Three features made the unwind faster than a normal currency move. First, positioning was one-sided: data from futures exchanges and broker surveys showed that speculators held some of their largest short-yen positions in years. Second, much of the money was borrowed, so even a modest move against the trade forced sales. Third, it was summer, when trading desks are thinner, and the worst selling hit on a Monday morning in Asia, before many Western traders were at their desks.

Options markets added fuel. As volatility rose, the cost of hedging jumped, and dealers who had sold protection had to trade in the same direction as the panic to stay balanced. Algorithms that cut risk when volatility rises sold too. None of these forces was new, but together they turned a policy surprise into a global sell-off within days.

The speed of the recovery was just as telling. Once the Bank of Japan signalled caution and the forced selling was done, there was no lasting economic damage to justify the panic prices, and buyers returned. Violent moves driven by positioning tend to reverse faster than moves driven by a real change in the economy.

Who was hurt and who was not

• Leveraged carry traders were hit hardest, especially those short yen against high-yielding currencies such as the Mexican peso.
• Japanese stock investors suffered a sharp but short-lived loss; a stronger yen also hurts the profits of Japan's exporters.
• Traders long the yen or holding protection against volatility made money.
• Long-term investors who did nothing mostly saw their losses recovered within weeks.

Lessons for traders

• Crowded trades exit through a narrow door. When everyone holds the same position, a small shock can force everyone out together.
• Rate gaps can close from both sides. Watch both central banks, not only the one paying the high rate.
• Correlations jump in a panic. Assets that normally move independently can all fall at once when investors need cash.
• Swap is not a safety net. A year of positive swap can disappear in a few days of adverse moves.

Frequently asked

Related reading

• Mrs Watanabe and Japan's retail traders
• What is forex leverage?
• FOMC guide for forex traders
• Forex risk management