Japanese stocks plummeted on August 5, experiencing their largest single-day drop since 1987, as investors unwound “carry trades” fueled by fears of a US economic slowdown, CNBC reports, citing experts.
The Nikkei 225 index closed over 12% down, losing a staggering 4,451 points, bringing its total losses since early July to a concerning 25%.
The sell-off was driven by a rapid unwinding of carry trades, where investors borrow in low-interest currencies like the Japanese yen and invest in higher-yielding assets elsewhere. This strategy has been under pressure in recent weeks as the yen has strengthened dramatically against the US dollar.
The yen’s surge, attributed to a combination of weak US economic data, disappointing tech earnings, and a more aggressive Bank of Japan, has triggered a scramble among investors to cover potential losses on their carry trades. Safe-haven assets like the yen and Swiss franc have benefited from the flight to safety.
Economists are expressing concern that the US Federal Reserve has been slow to cut interest rates, particularly with rising unemployment. The Fed’s decision to hold rates steady this week, despite concerns about the economy, has added to the market’s anxiety.
This “major bout of volatility” highlights the global market’s vulnerability to economic uncertainty and shifts in investor sentiment. As the US economy grapples with inflation and potential recession, the global impact on financial markets remains a significant concern.
