Yen Carry Trade Unwind: Nikkei Fell 12.4% in One Day

On Monday 5 August 2024 the Nikkei 225, Japan's main share index, closed 12.40% below its previous close. In the 19,226 daily closes from 16 May 1949 to 26 October 2026, one fall in a single day has been larger: 14.90% on 20 October 1987.

A yen carry trade is a loan in yen used to buy assets that pay more. The Bank for International Settlements (BIS), a body that serves central banks, describes the 5 August selling as an unwind of currency carry trades, which means those positions were closed. Price data cannot show who held them. This post sets out what four price series did and where the evidence stops.

A carry trade borrows in a currency with low interest rates and invests in assets that pay more. The gap in interest is the "carry". The currency the trader borrows is the funding currency. A yen carry trade uses the yen as the funding currency.

The BIS defines a carry trade as a borrowed cross-currency position. It names the yen as a funding currency of choice.

On 30 July 2024 the US central bank, the Federal Reserve (the Fed), targeted 5.25% to 5.50% for overnight lending between banks (the Fed Funds Rate).

The Bank of Japan had targeted around 0 to 0.1% for the same lending since 21 March 2024. It calls this the overnight call rate. The two rates sat more than 5 percentage points apart.

The main risk is a rise in the borrowed currency. The trader repays in yen, so a stronger yen makes the debt larger in dollar terms. From 30 July to 5 August the yen rose 6.79% against the dollar, so repaying the same yen took 6.79% more dollars.

The BIS says the borrowing in these positions makes them sensitive to changes in exchange rates, interest rates and volatility. It says the unwinding caused a sharp, if short-lived, rise in the funding currencies, mainly the yen.

In its Box C, the BIS records that the unwinding on 5 August coincided with a sell-off across global asset classes.

A fall in USD/JPY means a stronger yen. We use the Federal Reserve Board's noon rate in New York.

The Nikkei 225 indexes 225 Tokyo Stock Exchange shares. The Nasdaq Composite indexes the shares listed on the Nasdaq Stock Market. Both are price indices, so no dividends are counted.

The window runs from 30 July 2024, the last close before the Bank of Japan's decision on 31 July, to 9 August 2024, which is 9 trading days. Chart 1 sets each series to 100 at the 30 July close.

On 5 August USD/JPY stood at 93.64, the Nikkei 225 at 81.66 and the Nasdaq Composite at 94.48. That is a 6.36% fall in USD/JPY, the 6.79% rise in the yen above. The Nikkei closed 18.34% below its 30 July level. The Nasdaq Composite closed 5.52% below it.

By 9 August USD/JPY had recovered to 95.30, the Nikkei 225 to 90.91 and the Nasdaq Composite to 97.65.

Daily closes, 30 July to 9 August 2024. USD/JPY is the Federal Reserve Board noon rate in New York. Source: YX Insights price data

Each series closes at a different hour. Tokyo closes before New York opens, while the USD/JPY rate is struck at noon in New York. A single date therefore does not mean a single moment.

The Nikkei 225 fell 12.40% on 5 August, from the close of 2 August. We searched all 19,226 closes from 16 May 1949 to 26 October 2026. Only 20 October 1987, at 14.90%, was a larger one-day fall.

The next day the index rose 10.23%, the fifth-largest one-day rise in the same series.

Chart 2 measures each fall from its 2024 high to the 5 August close. We searched for the highs from 1 January to 5 August 2024. USD/JPY peaked at 161.73 on 10 July, the Nikkei 225 at 42,224.02 on 11 July and the Nasdaq Composite at 18,647.45 on 10 July.

From the 10 July high to 5 August USD/JPY fell 10.99%, which is a 12.35% rise in the yen against the dollar. The Nikkei 225 fell 25.50% and the Nasdaq Composite 13.12%.

The earlier 6.36% and 6.79% start from 30 July, so they measure a different period.

The Cboe Volatility Index (VIX) measures expected near-term volatility in US shares, as conveyed by stock index option prices.

The VIX closed at 38.57 on 5 August, up 64.9% from 23.39 on 2 August. It had last closed higher on 28 October 2020, at 40.28. We searched closes from 2 January 1990 to 4 August 2024. Chart 3 shows the nine closes in the window.

The VIX rose from 23.39 on 2 August to 38.57 on 5 August, then fell to 20.37 on 9 August. It first closed below 20 on 13 August, at 18.12, after the window in the chart.

We counted from 5 August to the first close at or above the 30 July close, searching to 26 October 2026.

The Nasdaq Composite regained its 30 July close first, on 13 August, 8 calendar days later. The Nikkei 225 took 25 days, to 30 August. USD/JPY took 93 days, to 6 November 2024.

Four price series show what moved, not who held what. The BIS Quarterly Review of September 2024 says tracking the size of carry trades and the entities involved is notoriously difficult. It says BIS statistics record yen borrowed from banks or through currency derivatives, but do not reveal what the money was used for.

The same review says the selling followed the Fed and Bank of Japan policy meetings and a disappointing US labour market release on Friday 2 August. Japan became the epicentre of the turbulence the following Monday.

Our data fit that sequence but cannot test the cause. The Bank of Japan raised its overnight call rate to around 0.25% on 31 July by a 7-2 vote of its policy board. The Fed left its range unchanged from 30 July to 9 August.

Our guide to what moves USD/JPY sets out the forces behind the pair, while the yen carry trade explains the position itself.

A yen carry trade unwind is the closing of positions funded in yen, which means buying yen back. In the week from 30 July 2024 the yen rose, the Nikkei 225 fell furthest, while the VIX jumped. Price data show those moves, but not who closed which position.

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The BIS says the selling followed Fed and Bank of Japan policy meetings and a disappointing US labour market release. The Bank of Japan had raised its overnight call rate to around 0.25% on 31 July 2024. The yen then rose 6.79% against the dollar by 5 August. Price data cannot prove a cause.

Yes, on 19 September 2024. The Fed kept its target range at 5.25% to 5.50% from 30 July to 9 August. The range in force from 19 September 2024 was 4.75% to 5.00%. Price data cannot show whether the unwind played a part. Our guide to how the Fed sets rates explains the process.

The largest was 14.90% on 20 October 1987. The second-largest was 12.40% on 5 August 2024, from the close of 2 August. Both rank among 19,226 daily closes from 16 May 1949 to 26 October 2026. The index rose 10.23% the next day.

The Nasdaq Composite regained its 30 July 2024 close by 13 August, the Nikkei 225 by 30 August and USD/JPY by 6 November. The VIX first closed below 20 on 13 August. Price data cannot show when positions closed, so these dates measure price moves only.

DISCLAIMER: This article is intended for educational purposes only. Any information or analysis in this note does not constitute an offer to sell or a solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice, nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.