[비즈한국] Concerns over the unwinding of the yen carry trade are mounting as global financial markets were shaken last week. The yen carry trade involves borrowing low-interest yen to invest in foreign stocks for profit; however, when the yen strengthens, the burden of yen-denominated debt rises, forcing carry trade investors to sell off their assets on a large scale. In short, if Japanese interest rates rise, investors are highly likely to unwind their yen carry trades. This inevitably puts significant pressure on global financial markets, as U.S. stocks, bonds, and emerging market real estate—where large amounts of yen carry funds have flowed—all face simultaneous downward pressure.
Specifically, concerns about a U.S. economic recession intensified last week due to shocks from the July ISM manufacturing index and employment figures. With the Bank of Japan (BOJ) raising interest rates and the U.S. Federal Reserve facing calls for an emergency rate cut, speculation arose that the gap in monetary policy between the U.S. and Japan would narrow, further fueling fears of a yen carry trade unwind. The yen-dollar exchange rate also dipped below the 150-yen mark for the first time since last March.
Experts pointed to the yen carry trade unwind as one of the primary drivers of the recent global stock market collapse. Lee Kyung-min, an analyst at Daishin Securities003540, stated, "The unwinding of the yen carry trade and the subsequent crash of the Nasdaq began with the yen's sharp reversal to strength on the 11th of last month."
Analysts believe the situation was exacerbated by a series of events: the 'Trump trade' on the 17th, concerns over the growth and profitability of AI and big tech on the 24th, the U.S. FOMC and BOJ meetings on the 31st, and recession fears on the 2nd and 5th of this month, all of which accelerated the liquidation. Lee explained, "The combination of hawkish remarks by BOJ Governor Kazuo Ueda at the end of last month into early this month and worsening U.S. employment data drove investor sentiment into a recession-induced panic, amplifying the trend of a weak dollar and a strong yen."
Evidence of this can be seen in the fact that once the yen-dollar exchange rate hit a bottom on the 5th and began to rebound, the global stock market stopped its freefall and staged a sharp recovery.
The question moving forward is how long and to what extent the yen carry trade unwinding will continue. JPMorgan estimated last week that three-quarters of the global carry trade, including the yen, has already been unwound, while Citigroup stated that the yen carry trade has moved out of the "danger zone."
However, it is the consensus among experts that it is impossible to accurately track the total inflow, the scale of the liquidation, or the remaining potential volume. Analyst Lee Kyung-min noted, "While various grounds are cited for a 50–70% unwinding, these are merely estimates. The ambiguity and uncertainty surrounding the scale of yen carry funds is another reason fueling investor panic."
Nevertheless, the hyper-strong yen phenomenon that impacted the global stock market is easing, and forex market volatility is expected to subside for the time being. Jeon Gyu-yeon, an analyst at Hana Securities, remarked, "On the 7th, BOJ Deputy Governor Shinichi Uchida stated that they would maintain an accommodative monetary policy for the time being and would not raise rates when markets are unstable. Since further rate hikes by the BOJ are likely not happening until the end of the year, there is little incentive for the yen to strengthen further in the near term." The analysis suggests there is no need for excessive concern over a yen carry trade collapse.
While invisible enemies are often the most frightening, one should not be purely pessimistic, as the fears regarding a sell-off from yen carry unwinding are currently being expressed as vague anxiety with little supporting data. Kang Jin-hyuk, an analyst at Shinhan Investment Corp., stated, "Concerns of a sudden yen carry trade unwind—like those seen during the Long-Term Capital Management (LTCM) bankruptcy or the IT bubble—are excessive," but added, "Given that it is unlikely the interest rate gap between the U.S. and Japan will widen again soon, it is necessary to prepare for a strong yen." He advised that industries where Korea and Japan compete heavily, such as automotive, chemicals, and semiconductors, which benefited from a strong yen in the past, may be promising areas to watch.