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since the beginning of this year, the global market has repeatedly jumped back and forth between the "rate cut trade" and the "recession trade" in the overall environment of unpredictable monetary policy prospects of many major central banks around the world, elections in many countries, and continued geopolitical turmoil. in early august, after a series of economic data broke out, the market was worried that the federal reserve would cut interest rates too late and the risk of a "hard landing" would inevitably emerge in the us economy. the "us recession trade", coupled with the appreciation of the yen and the liquidation of yen carry trades caused by the sudden "hawkish" stance of the bank of japan, triggered a global market shock from the united states to the asia-pacific region, from the stock market to the bond market and the foreign exchange market.

after just over a month of calm in the market, history repeats itself. the august non-farm payrolls data released last friday again fell short of expectations, causing frightened investors to instantly return to the "recession trade". the s&p 500 and nasdaq recorded their worst weekly performance since march 2023 and march 2022, respectively. the chicago board options exchange volatility index (vix) rose to 22.38, surging about 49% last week. commodities also fell across the board.

during the asia-pacific trading session on the 9th, japan's 225 index futures fell by more than 5% at one point, almost taking over the baton of the turmoil in the us stock market again. since then, the decline has narrowed. as of the afternoon of the press time of the first financial reporter, among the major asia-pacific stock indices, the nikkei 225 index, the topix index, the south korean kospi composite index, and the australian stock index s&p/asx index all fell by around 1%.

analysts warn that as the yen carry trade has re-emerged recently, with the bank of japan expected to continue raising interest rates and the yen to continue to appreciate against the dollar, the impact of further unwinding of the trade on global markets cannot be underestimated, and the turmoil in august may be just a prelude.

xinhua news agency photo

risk of further unwinding of yen carry trades

ben emons, chief investment officer and founder of fed watch advisors, said that leveraged hedge funds have re-increased their short positions in yen futures for some time, indicating that new carry trades have become active again. but at the same time, the yen continued to strengthen against the dollar last week to near its highest level this year, which may unwind these yen carry trades again. he described the carry trade as "wall street's oldest trade", which is not limited to the yen against the dollar, but also reflects the carry trade between the yen and the canadian dollar, and the dollar against emerging market currencies.

steve barrow, head of g10 strategy at standard bank of south africa, wrote in a research report last thursday: because of the rise in japanese interest rates and the yen, the funds that japan has invested overseas through trade and current account surpluses in the past few decades may continue to "reverse", and the continued unwinding of carry trades will indeed pose a serious threat to the optimistic outlook for risky assets.

after the asia-pacific market narrowly escaped a "black monday" again on the 9th, kathy lien, managing director of foreign exchange strategy at asset management giant bk asset management, said that as risk aversion grows in the market, yen traders will pay close attention to global stock markets. it is expected that the unwinding of yen carry trades will continue, and global stock markets may once again face a period of aggressive selling.

tom nakamura, currency strategist and co-head of fixed income at investment firm agf investments, admitted that it is not common for a country's currency trend to have a broad impact on u.s. stocks. although the british sovereign debt crisis in 2022 also had an impact on the pound, european bond markets and global markets, the extent was far less dramatic than the unwinding of the yen carry trade. in any case, he said that the further unwinding of the yen carry trade is still a huge cross-market risk, and investors are concerned about the actions of the bank of japan in the next one or two years. moreover, the current market volatility is still very high, so the impact of concerns about the slowdown in the u.s. economy and the unwinding of the yen carry trade may even be worse than in early august.

bank of japan's monetary policy is as important as the fed's

based on the potential impact of the bank of japan's policies on the yen carry trade, barro said that the outlook for the bank of japan's monetary policy has become as critical as that of the federal reserve. the recent statements by bank of japan officials and the current market's general expectation are that the bank of japan will continue to raise interest rates. it is worth mentioning that even though the adjusted real gdp (annualized quarterly rate) of japan's second quarter announced on the morning of the 9th was revised down to 2.9%, the market's expectation that the bank of japan will raise interest rates again this year has not wavered at all.

takeshi minami, chief economist at norinchukin research institute in tokyo, said the revised data was largely within the margin of error and would not change the overall view that japan's economy was recovering last quarter. therefore, "today's data will not really affect the bank of japan's policy stance. given the unstable financial markets, they are unlikely to raise rates this month, but they have made it clear that they insist on the idea of ​​continuing to raise rates, so i think there is a possibility of another rate hike this year."

tsutomu watanabe, a former bank of japan official and japan's top expert on inflation, even said last week: "the bank of japan may raise interest rates faster than the market currently expects, and may take two more rate hikes this year." watanabe was one of the potential candidates for the current bank of japan governor. this firm expectation, coupled with the federal reserve's first interest rate cut in september, has led to a continued narrowing of the us-japan interest rate gap. the yen continued to rise against the dollar last week to 142.99 in the afternoon of the 9th, approaching the high of the year.

monica defend, director of amundi investment institute, said that the bank of japan's unexpected rate hike in july and the shift in japan's monetary policy it indicated completely changed the yen's situation. "we currently believe that the fair value of the yen to the dollar is 140." nakamura also regards 140 as a key level. he also added that in the context of the market's awareness of the risk of further liquidation of carry trades caused by the continued appreciation of the yen, if the yen gradually appreciates further against the dollar to the 130-135 range, the impact on the market is still controllable. but if this appreciation is achieved quickly within 1-2 months, it may cause trouble for global investors again.

watanabe tsutomu suggested that the bank of japan should work to better communicate its monetary policy actions to ensure that the market does not panic. barro is more pessimistic, believing that "the chaos caused by the surge in the yen and the sharp drop in the stock market in august may only be a precursor to greater market changes in the future." arif husain, head of global fixed income and chief investment officer of asset management giant t rowe price group, also believes that the global market turmoil on august 5 has not yet come to an end. the tightening policy of the bank of japan and its impact on global capital flows are significant and may have a huge impact in the next few years. "although not every turmoil will lead to a major shock, market volatility may become the norm, and the global investment landscape may become more difficult in the next few years."