The yen carry trade.

Three steps: borrow in a low-rate currency, convert into a high-rate currency, and buy something that yields — government bonds, equities, property or more speculative assets. The gap between funding cost and yield is the carry.

Japan was the ideal source for years. The Bank of Japan held policy rates at or below zero while the United States, Australia or Mexico paid multiples of that. Borrowing at 0.1% and lending at 5% is nearly five points without needing any price appreciation.

The profit is almost always amplified with leverage. A four-point spread does not build a fund; the same spread at five to ten times leverage does. That leverage is exactly what makes the trade dangerous.

Japan combines three traits that rarely coincide: very low rates, a deep and liquid capital market, and a currency you can borrow and convert without restrictions. Since the 1990s that made the yen the world's default funding currency.

The scale is not trivial. Japanese pension funds, insurers, banks and foreign hedge funds together held positions estimated in the hundreds of billions of dollars. Nobody knows the exact figure because much of it runs through derivatives and offshore subsidiaries.

While the Bank of Japan stayed put the trade was calm: the yen even weakened gradually, adding to returns. For twenty years it was treated as a structural income source rather than a risk position.

On 31 July 2024 the Bank of Japan raised rates and signalled more could follow. Two days later a weak US jobs report pushed markets to price Fed cuts. The rate gap carrying the whole trade shrank from both ends at once.

The yen surged. For anyone borrowing in yen that was an immediate loss on the funding leg: the debt became more expensive in home-currency terms. Leveraged players got margin calls and had to sell — not what they wanted to sell, but what they could sell.

That is the core of every carry unwind: selling is driven by liquidity, not quality. On 5 August 2024 the Nikkei lost over 12% in a day, US tech fell hard, and bitcoin dropped from above $60,000 to around $49,000 within 48 hours. There was no bitcoin-specific news; it was simply the most sellable position in portfolios that needed cash.

The practical lesson is that crypto is not an island during stress. It sits in the same portfolios as equities and bonds and is often the easiest part to liquidate, especially over a weekend or outside market hours.

Watch USD/JPY, the spread between US and Japanese ten-year yields, and Bank of Japan meeting communications. A rapid yen appreciation of several percent within days has historically been the moment everything else wobbles.

Keep the nuance: an unwind is a liquidity shock, not a verdict on value. Markets largely recovered within weeks in 2024 — but leveraged holders were already out, which is the difference between a scare and a permanent loss.