Japanese Yen Strengthening Causes Global Market Turmoil

The Japanese Yen has recently strengthened significantly, reaching mid-January highs around 145.28 against the US dollar. This increase has sparked concerns across global markets, and investors are trying to wrap their heads around the implications.

Part of this surge in the Yen’s value is due to the Bank of Japan‘s latest interest rate hike of 15 basis points to 0.25 percent last week. This was the second hike this year and marked a shift from their ultra-loose monetary policy that has been in place for 17 years. The Bank of Japan also announced plans to cut its monthly bond purchases to further bolster the currency and stimulate economic growth.

The Yen has long been viewed as a safe-haven asset, popular among global investors for its low borrowing costs. Analysts from Barclays have pointed out that the Japanese Yen is currently one of the most overbought currencies among G10 majors, suggesting the potential for more significant price adjustments ahead.

This situation has led many investors to unwind their Yen-based carry trades—strategies that involve borrowing in low-interest currency and investing in higher-return assets. As the Yen appreciated by over 10 percent within three weeks, reaching a level not seen since early July, investors scrambled to cut losses, which added further pressure to equity markets around the world.

In Asia, this led to a drastic sell-off—Japan’s benchmark Nikkei index plummeted by 12.40%, marking its steepest one-day drop since the infamous Black Monday in October 1987. The Topix index suffered a similar fate, dropping 12.48%. The ripple effect of this downturn was felt globally, with significant declines in European markets and India’s Sensex melting more than 2,200 points, resulting in a staggering ₹15 trillion loss in investor wealth.

Concerns about the US economy are also adding to this volatility, especially with rising unemployment fears and speculation about Federal Reserve interest rate adjustments. Some experts are worried that the carry trade unwinding may continue to cause trouble for markets worldwide, leading to increased volatility across various financial platforms.