August 5, 2024: The Yen Carry Unwind in One Day
Japan's Nikkei fell 12.4 percent, its worst day since 1987, and the VIX touched 65 before New York even opened. The trigger was a quarter point rate hike in Tokyo. The mechanism was the world's biggest funding trade running in reverse.
The Trade Everyone Was In
A carry trade is simple: borrow money in a currency with low interest rates, convert it, and invest it somewhere that pays more. For most of the 2020s the borrowing side of that sentence had one obvious answer. Japan held its policy rate at roughly zero, and briefly below it, long after the Federal Reserve had pushed American rates above 5 percent. Borrowing yen at almost nothing to buy dollar assets yielding 5 percent looked like free money, and the trade worked doubly well because the yen kept weakening, which shrank the value of the debt you owed. By early July 2024 the yen had slid to about 162 per dollar, its weakest level in nearly four decades, and estimates of yen funded positions ran into the hundreds of billions of dollars across hedge funds, trend followers, and retail FX accounts.
The catch is buried in the mechanics. A carry trade is short the funding currency. If the yen strengthens, the debt grows in dollar terms and the trade loses money fast. Carry trades therefore have a famous return profile: they collect steady small gains and occasionally give them back all at once. Traders describe it as picking up nickels in front of a steamroller. In August 2024 the steamroller arrived on a Monday.
Two Announcements and a Weekend
On July 31, 2024, the Bank of Japan surprised markets by raising its policy rate to around 0.25 percent, from a range of roughly 0 to 0.1 percent, and laying out plans to slow its bond buying. The move itself was tiny. The signal was not: the last country holding rates near zero was actually leaving. The yen, which had already begun firming in July, strengthened further.
Two days later, on August 2, the US jobs report showed just 114,000 jobs added in July against expectations around 175,000, with unemployment ticking up to 4.3 percent. Suddenly markets were pricing a slowing American economy, which meant Fed rate cuts, which meant a narrower gap between US and Japanese rates. Both legs of the carry trade broke in the same week: the funding currency was rising and the target assets were wobbling. Positions that lose money trigger margin calls, demands for more collateral, and the fastest way to meet one is to close the trade, which means buying back yen and selling the assets, which pushes the yen higher and asset prices lower, which triggers the next margin call.
Monday in Tokyo
When Japanese markets opened on Monday, August 5, the spiral was fully loaded. The Nikkei 225 fell 12.4 percent, a loss of 4,451 points, its worst single day since the October 1987 crash. The broader TOPIX index lost about 12 percent. Circuit breakers on Japanese equity futures halted trading repeatedly during the session. The selling spread across Asia, hit Europe, and landed on the US open with the S&P 500 down sharply from the start.
Nothing fundamental about Japanese companies changed over that weekend. What changed was the price of the money that had been holding the positions up. When the funding currency of the world moves 10 percent in a month, every asset bought with it gets repriced whether it deserves to or not.
The VIX at 65
The strangest print of the day came from the volatility market. The VIX, which measures the price of S&P 500 options over the next thirty days, spiked to an intraday high above 65 in the early morning hours of August 5, a level seen only in the 2008 crisis and March 2020. Part of that print was real panic and part was plumbing: in the thin premarket hours the options quotes that feed the VIX calculation widen dramatically, so the index exaggerated the stress. By the close the VIX settled back into the high 30s, still roughly triple its level from weeks earlier. The S&P 500 finished the day down about 3 percent, its worst session since 2022.
| Measure | August 5, 2024 |
|---|---|
| Nikkei 225 | minus 12.4 percent, worst day since 1987 |
| TOPIX | about minus 12 percent |
| S&P 500 | minus 3.0 percent |
| VIX intraday peak | above 65, highest since March 2020 |
| Yen vs dollar | from about 162 in early July toward the low 140s |
The Unwind Machinery
The Bank for International Settlements later published a post mortem, and the mechanics it described matter more than the headline numbers. The selling was amplified by deleveraging: funds that size positions based on volatility, including volatility targeting funds and trend following CTAs, are forced by their own rules to cut exposure when volatility spikes. Rising margin requirements at brokers and clearinghouses forced further sales. None of these sellers had a view that stocks were overvalued. They were following risk rules, and the rules all pointed the same direction at the same time. That is why the move was so fast and also why it reversed so fast: forced selling exhausts itself when the positions are gone.
The Recovery and the Lesson
Tuesday, August 6, the Nikkei rebounded more than 10 percent, one of its best days ever. On August 7 the Bank of Japan\'s deputy governor publicly said the bank would not raise rates further while markets were unstable, an unusual piece of verbal first aid. By the end of that week the S&P 500 had recovered most of the losses, and within weeks the episode looked like a bad dream on the charts. In hindsight, August 5 was not the start of a crisis but a stress test that markets barely passed, and it put the size of the yen carry complex on every regulator\'s radar. It also previewed a theme that returned in 2025: modern crashes are increasingly positioning events, not valuation events, and they move at the speed of margin software.
The Bottom Line
The August 2024 crash was a funding trade unwinding, not an economic verdict. Borrow short in a currency that can rise, lever the proceeds, and you own a position that works until it suddenly does not. When the Bank of Japan moved a quarter point, the largest funding trade in the world proved that the exit is always smaller than the room. For anyone learning markets, the lesson is permanent: know what is funding the positions around you, because when the funding moves, everything it bought moves together.