Yen carry trade unwind triggers global market liquidation

The August 2024 yen carry trade unwind triggered a significant global deleveraging event. This phenomenon occurred when a sudden surge in the Japanese yen forced institutional players, such as hedge funds, to engage in mechanical, forced liquidations to cover losses.

During the peak panic window, an estimated $1.1 trillion in cross-border assets was liquidated. The sell-off primarily targeted highly appreciated risk assets, including US technology stocks, Japanese equities—which led to a historic plunge in the Nikkei 225—and cryptocurrencies like bitcoin. The core leveraged portion of the yen-funded carry trade, previously estimated between $250 billion and $500 billion, saw roughly 50% of its active trade unwound within the first two weeks.

This unwind required an immediate buyback of approximately $200 billion to $250 billion in Japanese yen to settle debts. While the S&P 500 dropped roughly 3% on August 5, 2024, and fell about 8% from its local high, the index recovered its losses within weeks because the panic was structural rather than fundamental.