The various explanations offered by the media for last Monday’s (Aug. 5) collapse of global stock markets—a bad U.S. jobs report, nervousness about the AI bubble, concern over Fed interest policy, etc.—don’t really explain the massive financial flows and turbulence involved. An article on Aug. 7 in Financial Times comes closer to the truth by pointing to a sharp unwinding of the multi-trillion-dollar yen carry trade, triggered by an unexpected rise in Japanese interest rates. FT admits that no one really knows the size of the yen carry trade, but that it’s huge, possibly running into the trillions of dollars, and that the problem isn’t over.
The article in question is headlined “Unwinding of Yen ‘Carry Trade’ Still Threatens Markets, Say Analysts. Resurgent Japanese currency forces speculators to shut down years’ worth of bets that could run into trillions of dollars.” It reports that “the global unwinding of the world’s biggest ‘carry trade’ has the potential to destabilize markets further,” explaining that the carry trade refers to “borrowing in a low-interest-rate country to fund investment in assets elsewhere that offer higher returns…. The cheap fundraising in yen [has been] pouring into everything from emerging market currencies such as the Mexican Peso to Taiwanese equities, real estate and U.S. tech stocks.” Hedge funds are among the biggest speculators in the carry trade.
