The root of the problem is the yen carry trade

 

In Japan you can still borrow money almost for free.

As a result, investors such as hedge funds and investment banks have taken out large debts there. They then exchanged the yen they borrowed into another currency where interest rates are higher, such as US dollars or Mexican pesos.

Bank of Japan took everyone by surprise by raising borrowing costs from 0.1pc to 0.25pc, and signalling it was prepared to go further.

“The market was a bit complacent and sitting on a very large-sized carry trade. You just need a few of those people saying ‘I don’t want it anymore’,” says Andres Sanchez Balcazar, head of global bonds at Pictet Asset Management.

“So they sell the foreign currency and buy the yen, they close their liabilities in yen and they close the investments in other currencies.

Telegraph 8 August 2024

https://www.telegraph.co.uk/business/2024/08/08/japan-blew-up-global-markets-it-could-happen-again/

Stocks still vulnerable to further unwind of yen carry trade

https://englundmacro.blogspot.com/2024/08/stocks-still-vulnerable-to-further.html

Market crashes usually have the same mechanism - Unwinding of carry trades is helping

https://englundmacro.blogspot.com/2024/08/market-crashes-usually-have-same.html