On Monday, August 5, stocks, ETFs and cryptocurrencies such as Bitcoin lost double-digit amounts in value. The DAX, Dow Jones, S&P 500 and Nasdaq stock indices fell between two and 3.5 percent within one day. Several trillion dollars were thus – on paper – destroyed in one fell swoop.
Stock market crash destroys trillions of dollars
Initially, fears of a recession in the US, caused by weak economic and labor market data, were seen as the main reason for the decline in stock markets and crypto markets. Disappointing figures in the tech sector are likely to have exacerbated the price slump.
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However, the trigger was probably another event, as heise.de reports. According to the report, after years of low interest rate policy in Japan, a minimal increase in key interest rates to just 0.25 percent caused panic among stock market traders.
Yen carry trade: complex financial construct
This is related to a complex financial construct that developed due to the zero interest rates in Japan, the so-called yen carry trade. For years, the Japanese government and pension funds as well as Western investors seem to have been able to reap seemingly free profits here.
However, only as long as the conditions were right. These consisted of almost interest-free loans in Japan, which were taken out in yen. The money was then exchanged for US dollars to buy government bonds, ETF shares and stocks, as heise.de explains.
If the return on investments in US dollars is higher than the interest costs for the yen loan – which has been the case for years – then the financial professionals make a profit. In addition, money could also be made from the falling yen exchange rate because it made repaying the loans even cheaper.
Key interest rate hike causes share price slide
The announced increase in the key interest rate to 0.25 percent has now apparently shaken this financial construct. The yen’s downward slide has ended, and the value of the dollar against the yen has fallen by eight percent within a few days. This exceeds the yields on government bonds, for example.
The fear of further increases in the yen is said to have also led investors to invest their assets in ETFs and stocks in order to exchange US dollars for yen. The crash was then intensified by so-called stop-loss sales and bets on falling prices.
How dangerous is the yen carry trade?
In addition to the “cocktail of uncertainty”, such as fears of a recession in the USA and worries about a wildfire in the Middle East, investors should also keep an eye on possible further price slides due to the effects of the yen carry trade. It is not yet clear how much money investors have put into this construct and how many investment positions have already been liquidated.
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According to estimates At least one trillion dollars are said to have flowed in. Deutsche Bank spoke of the end of 2023 of up to 20 trillion dollarsThe yen carry trade could therefore trigger or at least fuel further turbulence in the coming weeks.
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