The yen carry trade — borrowing cheap yen to invest in higher-yielding currencies — unwound abruptly after the Bank of Japan raised its policy rate to around 0.25% on July 31, 2024. On August 5, 2024, TOPIX fell 12% and the VIX spiked above 60, with losses spreading to European, U.S., and Asian equities. The Bank for International Settlements estimates carry positions at roughly ¥40 trillion ($250 billion) before the event, a figure it says is likely understated, and warns that procyclical deleveraging and margin calls remain a structural risk.
What is the basic mechanism behind a carry trade?
A carry trade means borrowing in a low-interest currency and investing the proceeds in a higher-interest one to pocket the rate difference. The International Monetary Fund defines it precisely this way: investors borrow in a low-interest rate currency, the funding currency, and invest in a high-interest currency, the target currency, to capture the interest-rate spreadCITE:E1.
Why has the yen become the preferred funding currency for carry trades?
The yen became the go-to funding currency because Japanese interest rates stayed near zero for roughly two decades. The IMF notes that this near-zero-rate environment made the yen a popular funding currency, while also leaving it particularly vulnerable to carry trade reversalsCITE:E2. In other words, the same feature that made the yen cheap to borrow — persistently low rates — is what made any Bank of Japan (日本銀行) tightening a potential trigger for a rapid unwind.
What did the Bank of Japan actually decide, and when?
The Bank of Japan raised its policy rate on July 31, 2024, setting the stage for the unwind that followed. Its Policy Board voted 7 to 2 to guide the uncollateralized overnight call rate to around 0.25%CITE:E3. That increase directly narrowed the interest-rate gap that carry trades depend on, making yen-funded positions less profitable and more exposed to further rate moves.
What happened in global markets on August 5, 2024?
On August 5, 2024, Japan's TOPIX index plunged 12% in a single session as leveraged positions and carry trades were unwound, and the shock spread worldwide within hours. According to the Bank for International Settlements (BIS), losses and volatility spread to other markets through the day: the Eurostoxx fell 1.7%, the S&P 500 lost a further 3.0%, the MSCI Asia Pacific Index saw its worst drop in a year, and in off-hours trading the VIX spiked to levels above 60CITE:E4.
| Market/Indicator | Move on August 5, 2024 |
|---|
| TOPIX (Japan) | -12% |
| S&P 500 (U.S.) | -3.0% |
| Eurostoxx (Europe) | -1.7% |
| MSCI Asia Pacific Index | Worst one-day drop in a year |
| VIX (off-hours) | Spiked above 60 |
| BOJ policy rate (from July 31, 2024) | ~0.25% (7-2 vote) |
Why can a carry-trade unwind shake global markets so hard?
Carry trades combine high leverage with a bet on continued low volatility, so a sudden shock forces rapid, outsized losses. The BIS describes the dynamic directly: carry strategies tend to generate small but consistent returns during calm markets but quickly generate steep losses once turbulence erupts, a pattern it says is often portrayed as "picking up nickels in front of a steamroller"CITE:E5. When volatility jumps, leveraged positions get margined or unwound all at once, and that forced selling is what transmits the shock across asset classes and borders.
How large were the yen carry positions behind the shock?
The overall scale of yen carry trades is hard to pin down, but the BIS puts a rough middle estimate at about ¥40 trillion ($250 billion) heading into the event. The BIS states that various estimates based on both on- and off-balance-sheet activity yield this rough middle ballpark, and that the true figure is, if anything, biased downward because of data gapsCITE:E6. That means the position size that helped drive the August 5 shock could have been larger than even this estimate suggests.
What does this episode signal about systemic financial risk?
The BIS frames the episode as another case study in how procyclical deleveraging and margin increases can amplify market volatility. It states that the event was yet another example of volatility exacerbated by procyclical deleveraging and margin increases, and that while an outright market dysfunction was averted this time, the structural features underpinning such episodes deserve continued attention by policymakersCITE:E7.
Taken together, these facts trace a single causal chain: two decades of near-zero Japanese rates built the yen's role as the world's dominant funding currencyCITE:E2, the Bank of Japan's July 31, 2024 rate move to around 0.25%CITE:E3 narrowed the spread that carry trades rely on, and the resulting unwind on August 5, 2024 hit TOPIX, the VIX, and equity indices from Europe to the U.S. to Asia within a single trading dayCITE:E4. The BIS's own characterization of carry trades as high-leverage, low-volatility betsCITE:E5, its estimate that roughly ¥40 trillion in positions may itself be understatedCITE:E6, and its explicit warning about procyclical deleveraging and margin dynamicsCITE:E7 together point to the same underlying tension: the mechanics that make carry trades profitable in calm markets are the same mechanics that make their unwind capable of moving markets far beyond Japan.