The Yen Carry Trade Unwind: Japan's Worst Day Since 1987
A small Bank of Japan rate hike unwound years of borrowed-yen trades funding investments worldwide, sending the Nikkei down over 12% in a single session — Japan's worst day since Black Monday 1987 — and dragging global markets down with it before recovering within weeks.
- Nikkei one-day decline
- −12.4%
- Trigger
- BOJ rate hike, near 0% to 0.25%
- S&P 500 same-week decline
- ~3% in a day
What happened
For years, traders borrowed yen at Japan's near-zero interest rates and used the proceeds to buy higher-yielding assets elsewhere — a strategy known as a carry trade. It worked reliably as long as the yen stayed weak and Japanese rates stayed near zero, and by mid-2024 an enormous amount of leveraged money worldwide depended on both conditions holding.
On July 31, 2024, the Bank of Japan raised its policy rate from near 0% to 0.25% — a small move by the standards of most central banks, but enough to strengthen the yen and make the borrowing side of the carry trade suddenly more expensive. As the yen rose, leveraged carry positions started losing money, forcing funds to unwind them by selling the assets they had bought and buying back yen to repay what they had borrowed.
That unwinding accelerated into itself: selling pushed asset prices down and yen-buying pushed the yen up further, forcing more of the same trades to unwind under worse terms. On August 5, 2024, the Nikkei 225 fell about 12.4% in a single session — its worst day since the 1987 crash — while US markets fell sharply the same week and the VIX volatility index spiked to levels last seen during COVID and the 2008 crisis.
Why it still matters
The carry trade unwind is a clean example of hidden, cross-border leverage: the risk was not visible in any single market's own data, because the trade borrowed in one country's currency to invest in assets in others, and it only became visible once the funding side of the trade moved against it.
It is also a reminder that a strategy's stability can depend entirely on a variable a trader does not directly control — in this case, another country's central bank policy. A position that is only safe as long as a specific rate stays near zero is a leveraged bet on that rate, whether or not it is framed that way.