How did the Yen Carry Trade Almost Take Down The Stock Market?

In August 2024, an unwind of what's known as the Yen Carry Trade caused volatile panic by investors in not only Japan's stock market, but in all markets around the world. Let’s explore the mechanics of the Yen Carry Trade, see the dramatic impact it had on global markets, and look at how the Bank of Japan has moved since.

For decades, Japan has held interest rates near zero in hopes of encouraging economic growth as the world's fourth-largest economy. The country has struggled to produce a consistently positive Gross Domestic Product (GDP), something officials and economists hoped the loose monetary policy would remedy. While the effect of low borrowing costs on Japan's economy is undetermined, what is evident is the massive implications it has had for Japan's currency and how it was leveraged as a tool for liquidity across the globe.

How Does A Carry Trade Work?

A carry trade involves utilizing the difference in interest rates between two central banks and their respective currencies. The lower interest rate currency, often called the "funding currency" is shorted by traders, or possibly loaned in that country and then sold for another "asset currency."

Without major changes to interest rates or currency exchange values, carry trades allow parties to profit from this difference, borrowing for less and using the higher interest rates to maximize returns. This may sound like an infinite money glitch, but what happens when the governing bodies change interest rates? Well, that's exactly what happened with the Bank of Japan…

Decades of Japanese Deflation

Until March 2024, when it ended its negative interest rate policy with its first hike in 17 years, the Bank of Japan had not raised rates since 2007. This zero-interest-rate policy (ZIRP) had been maintained by the central bank in an effort to combat low economic growth in the region. The bank had also actively intervened in both the government bond market, a practice known as yield curve control, and, in 2024, in the forex markets.

This monetary policy combined with Japan's low economic and population growth led Japanese authorities to spend over $36 billion in July 2024 alone in an effort to reverse the Yen. Weakness in the Yen had hit 34-year lows against the US dollar, highlighting the dramatic need for a change in policy.

Regime Change At The BOJ

In April 2023, the Bank of Japan came under a new governor, Kazuo Ueda, who holds differing monetary views from the bank's previous leader. After months of signaling a coming change, on July 31, 2024 the BOJ raised interest rates to 0.25%, the highest rate Japan had seen since 2008. While this 25 basis point change seems small, it triggered a massive move in both forex and equity markets as it changed the cost of capital on potentially trillions of dollars in equities, bonds, and open currency positions.

Unwinding The Short Yen

Once the interest rate hike went into effect August 1st, 2024, enormous shifts in Japan's currency took place. At one point, the Yen had strengthened against the US dollar as much as +7.5% in only three days! As traders and financial institutions looked to unwind their short Yen positions before they rapidly dropped in value, the influx pushed not only the currency, but all of Japan's equity portfolios into a volatile frenzy, marking the largest price swing these markets have seen since early 2020. Broad regional stock indices, like the Nikkei Index, halted trading numerous times in this period.

Effects Felt Around The Globe

The instability of not only the Yen, but the changing cost basis of open carry trades rocked US markets. The VIX (an index that tracks volatility and through that said to measure 'market fear') rose over +300% in only two trading sessions over this time. As the carry trades unwound, VIX hit its third-highest level since the index was created in 1993!

Stocks slid as fear escalated in markets. In the worst day since the start of the AI market rally, the US S&P 500 index closed down over -3% on August 5th. Some JP Morgan analysts said the positions in the Yen carry trade could be valued at $4 Trillion, a number that seems feasible given the breadth and size of the sell off. While markets stabilized in the weeks after Japan's rate hike, it is important to understand the incredible shifts in stocks, forex, and even Bitcoin that can come from a single decision at a central bank.

What The BOJ Has Done Since

The July 2024 move was the start of a slow tightening cycle, not a one-off. The BOJ raised its policy rate to 0.5% on January 24, 2025, and to 0.75% on December 19, 2025, the highest level since 1995. It held at 0.75% in January 2026 while signaling that further increases remain possible if activity and inflation evolve in line with its projections.

Each step raises the cost of funding a yen carry trade, which is why BOJ meetings now carry weight far beyond Japan. The playbook this episode taught still applies: watch the funding currency, the volatility index, and the equity indices together, because an unwind shows up in all three at once. You can track USD/JPY on LuxAlgo's forex charts and see the sector picture on the LuxAlgo Stock Heatmap, which shows the whole U.S. market on one canvas, sized by market cap and colored by performance.