Japan Stock Market Crash: Mapping the Yen Carry Trade Unwind

Vansh led the research and authorship of a report on the Japan stock market crash of August 2024 for The Consulting Club at Dyal Singh College.

He began by establishing the structural context. Japan was the world's third-largest economy, with the Nikkei 225 as its benchmark index and the yen as the third most traded currency in global markets. The country was a major exporter of technology, automobiles, and machinery, making its financial conditions globally consequential.

The proximate trigger was the Bank of Japan's decision on July 31st, 2024 to raise its key interest rate to 0.25%, up from a range of 0 to 0.1%. This was the highest rate increase the BOJ had made since 2008.

The Yen Carry Trade Mechanism

Vansh identified the yen carry trade as the central transmission mechanism. Institutional investors had borrowed yen at near-zero rates and deployed the proceeds into higher-yielding assets including emerging market equities, alternative investments, and cryptocurrencies. When the BOJ raised rates, the yen strengthened, meaning investors had to pay more dollars to repay yen-denominated borrowings. This wiped out gains and in many cases produced losses, forcing rapid unwinding of positions across risky asset classes.

He considered alternative explanations, including rising unemployment in Japan and the country's proximity to recession, and concluded that while domestic weakness contributed to the Nikkei's fall, the global spillover to other indices was primarily explained by the carry trade unwind rather than Japan's domestic economic conditions.

Global Market Impact

He mapped the impact across major indices: the S&P 500 fell 2.4%, NASDAQ fell 2.8%, FTSE 100 fell 2.1%, DAX fell 2.5%, Dow Jones fell approximately 2.2%, and NIFTY 50 fell roughly 2.8%. He framed the conclusion around investor sentiment and global financial interconnectedness, noting that as of August 16th, 2024, markets had stabilized with the Nikkei 225 recovering above 38,000 points, though weak US employment data continued to raise concerns about the Federal Reserve's next move.