After a turbulent start to August, marked by global markets under pressure—most notably Japan’s Nikkei 225 index plunging 12.4 percent in a single day—markets managed to recover, aided by central bank intervention, and closed out the month on a positive note. Despite the early decline, the S&P 500 index ended August with a 2.2 percent gain.
On August 1, 2024, the Dow Jones Industrial Average experienced a dramatic near-1000 point swing from intraday high to low, a volatility rarely seen in a stable market. Just days later, on August 5, 2024, a global market sell-off was triggered by Japan as the “yen carry trade” unraveled. The catalyst was the Bank of Japan (BOJ) raising interest rates to 25 basis points (0.25%)—the highest in seventeen years—which led to a sharp move in the U.S. dollar/yen exchange rate from about 160 to 142, forcing a rapid unwinding of massive leveraged positions.
For years, many investors had borrowed large sums in yen, often at near-zero or negative interest rates, to invest in higher-yielding assets—a strategy known as the “yen carry trade.” This approach works as long as interest rate differentials and currency exchange rates remain relatively stable. However, when the dollar/yen exchange rate moved approximately 7 percent in a single day, these leveraged bets collapsed, forcing the unwinding of positions.
In response, the BOJ announced it would refrain from raising rates during periods of market instability, sparking a strong rally. Despite this, the underlying issue remains: the BOJ still needs to raise interest rates.