All case studies
💴Sales & Trading

The Yen Carry Trade Unwind (2024)

August 2024·Advanced

In short

In August 2024, the Bank of Japan raised interest rates just as US data softened. Traders rushed to close the yen carry trade (borrowing cheap yen to buy higher-yielding assets abroad), driving the Nikkei's biggest one-day fall since 1987 and a spike in volatility.

The background

The walk-through

1

The carry trade

For years, investors borrowed cheap yen and used the proceeds to buy higher-yielding assets abroad (US tech, emerging market bonds). It worked while the yen stayed weak and volatility stayed low.

2

The trigger

The Bank of Japan raised rates on July 31. Two days later, weak US jobs data raised fears of a slowdown. The yen surged as traders closed the carry, selling foreign assets and buying yen back.

3

The unwinds

Closing a carry trade means selling the foreign asset and buying the funding currency. That pushed the yen up and equities down at the same time, in a feedback loop.

4

The drop

On August 5, the Nikkei fell about 12% and the VIX volatility index spiked to around 65. Leveraged funds with carry positions faced rapid margin calls and were forced to cut risk fast.

5

The recovery

Markets stabilised within days. Most of the carry had been unwound, and firmer US data eased recession fears. A sharp reminder that crowded trades reverse violently.

Key takeaways

  • ▹Carry trades work until they don't. They look safe in calm markets and blow up in stress.
  • ▹Crowded, leveraged positioning unwinds fast and across asset classes at once.
  • ▹FX and equity volatility are deeply linked through funding trades.

Why it matters

Sales & Trading

FX desks, cross-asset correlation, and volatility trading. This is a multi-asset story.

Macro

A textbook case of positioning, leverage, and policy divergence driving a market shock.

Key terms

Carry trade
Borrowing in a low-rate currency to invest in a higher-yielding one, profiting from the difference.
Funding currency
The currency you borrow in (here, the yen).
VIX
A measure of expected US stock market volatility, often called the fear index.
Unwind
Closing out a trade. For a carry trade, selling the asset and buying back the funding currency.
All case studies

We use essential cookies to keep you logged in and, with your permission, analytics cookies to improve FINdr. See our Cookies Policy.