🚨⛩ JAPANESE BLOODBATH: WHY? ⛩🚨
The short answer is due to "Carry Trade". The definition is "a FOREX (foreign exchange) investment strategy that seeks to take advantage of interest rate differences between different countries. In simple terms, it involves borrowing in a currency with a low interest rate and using those funds to invest in another currency with a higher interest rate."
Japan had been an exporter of Yen [JPY]. In one decade, BoJ (Bank of Japan) had a monetary policy of massive buy of bonds and fewer interest rates. This meant an inflationary policy where the BoJ favoured the issuance of JPY. It helped to buy any kind of assets around the world. In particular, many JPY was converted mainly into US Dollar [USD] and other currencies for this purpose. It was very easy to borrow in JPY, paying a minimum rate, and buy other financial assets in other currencies that paid more.
It is important to note that this situation was “special” due to the Japanese economic and social conditions. This policy applied in another LATAM country, for example, would have meant chaos and a wave of hyperinflation. In Japan it worked differently and perhaps in another post I will explain why.
Since June 2024, the JPY stopped depreciating against the USD due to the BoJ's intervention in the Japanese exchange rate (the bank was a strong buyer of the currency). However, panic began last week due to the announcement of further interventions, in which the BoJ will raise its interest rate. This means the strengthening of the JPY. Now, if you hold JPY, you will receive more interest, but you will also pay more on the debt.
As a result, many speculators had to massively liquidate their leveraged positions. That is, close their financial assets in USD in order to buy JPY and afford and pay the new interest rate increases. The foreign assets was mainly in NYSE-NASDAQ stocks (technology) and US Bonds. Nevertheless, the impact resonated across all the Western stocks the Japanese invested in because many financial assets are linked.
The sell-off and panic will continue until the BoJ decides to stop raising interest rates or speculators cover their Japanese positions by selling foreign currencies. It is difficult to estimate, but new information will be released in the coming weeks. Of course, the panic was catalyzed by the US economical data, in which it reflects the increase of unemployment and the potencial recession due to Sahm's rule (when unemployment over the past 3 months exceeds 0.5%, it is certain to continue rising and with it, the probability of a recession). Presumably, this can also encourage closing positions in USD.
Finally, the fear could also be due to the fact that the NIKKEI 225 was at the same level as it was 34 years ago. The question is... Will history repeat itself?
The best analysis is yours!
J. Joel Padilla
https://whatsapp.com/channel/0029Va9EHFk8fewujZelbM3t
https://www.linkedin.com/in/joelpadilla/recent-activity/
https://jjplindex.blogspot.com/
The short answer is due to "Carry Trade". The definition is "a FOREX (foreign exchange) investment strategy that seeks to take advantage of interest rate differences between different countries. In simple terms, it involves borrowing in a currency with a low interest rate and using those funds to invest in another currency with a higher interest rate."
Japan had been an exporter of Yen [JPY]. In one decade, BoJ (Bank of Japan) had a monetary policy of massive buy of bonds and fewer interest rates. This meant an inflationary policy where the BoJ favoured the issuance of JPY. It helped to buy any kind of assets around the world. In particular, many JPY was converted mainly into US Dollar [USD] and other currencies for this purpose. It was very easy to borrow in JPY, paying a minimum rate, and buy other financial assets in other currencies that paid more.
It is important to note that this situation was “special” due to the Japanese economic and social conditions. This policy applied in another LATAM country, for example, would have meant chaos and a wave of hyperinflation. In Japan it worked differently and perhaps in another post I will explain why.
Since June 2024, the JPY stopped depreciating against the USD due to the BoJ's intervention in the Japanese exchange rate (the bank was a strong buyer of the currency). However, panic began last week due to the announcement of further interventions, in which the BoJ will raise its interest rate. This means the strengthening of the JPY. Now, if you hold JPY, you will receive more interest, but you will also pay more on the debt.
As a result, many speculators had to massively liquidate their leveraged positions. That is, close their financial assets in USD in order to buy JPY and afford and pay the new interest rate increases. The foreign assets was mainly in NYSE-NASDAQ stocks (technology) and US Bonds. Nevertheless, the impact resonated across all the Western stocks the Japanese invested in because many financial assets are linked.
The sell-off and panic will continue until the BoJ decides to stop raising interest rates or speculators cover their Japanese positions by selling foreign currencies. It is difficult to estimate, but new information will be released in the coming weeks. Of course, the panic was catalyzed by the US economical data, in which it reflects the increase of unemployment and the potencial recession due to Sahm's rule (when unemployment over the past 3 months exceeds 0.5%, it is certain to continue rising and with it, the probability of a recession). Presumably, this can also encourage closing positions in USD.
Finally, the fear could also be due to the fact that the NIKKEI 225 was at the same level as it was 34 years ago. The question is... Will history repeat itself?
The best analysis is yours!
J. Joel Padilla
https://whatsapp.com/channel/0029Va9EHFk8fewujZelbM3t
https://www.linkedin.com/in/joelpadilla/recent-activity/
https://jjplindex.blogspot.com/
Copyright: Joel Padilla 2024
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