What Is Carry Trade, Which Caused Biggest Crash In Japanese Markets Since 1987?
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The Japanese equity markets tumbled as much as 12 per cent on Monday.
Carry Trade is when an investor borrows in a currency with low interest rates, such as the yen, and reinvests in a currency with a higher rate of return like the dollar.
The global equities markets on Monday saw massive sell-offs amid fears of the US economic recession following weak jobs data. Though the international markets saw one of their biggest falls, the Japanese markets tumbled as much as 12 per cent, its biggest fall since 1987, caused by the fear of an end of carry trade.
What Is A Carry Trade?
“Japanese markets fear that there can be an end of the carry trade,” Sharad Chandra Shukla, director at Mehta Equities, said.
Carry Trade is when an investor borrows in a currency with low interest rates, such as the yen, and reinvests in a currency with a higher rate of return like the dollar.
For 30 years, the Bank of Japan kept an interest rate near zero, which made investors borrow and invest in T-bills and equities across the globe. If interest rates go up in Japan, this trade will unwind, Shukla said.
Apart from the carry trade, US economic data and geopolitical tensions are the other reasons for the markets to correct, he added.
The Nikkei Stock Average, which is Japan’s benchmark index, on Monday saw its worst-ever daily sell-off, losing 4,451.28 points from the previous day’s closing, according to Nikkei Asia. The average closed down 12.4 per cent to 31,458.42. In terms of percentage, it was the second-largest fall since the Black Monday crash of October 1987, when the index lost 3,836.48 points (14.9%), which had been the worst previous decline.
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