Yen carry unwind day: global equities tumble in synchronized selloff

Global equities suffered their worst single-day declines since the COVID crash on August 5 2024, driven by a violent unwind of yen-funded carry trades. The Nikkei 225 fell 12.40%, the largest single-day decline since October 1987. The S&P 500 fell 3.00% and VIX spiked 64.9% to close at 38.57, its third highest single-day gain on record. USDJPY fell 3% to 144.18, down nearly 12% from its July 3 peak of 161.96.

The catalyst was the combination of BoJ rate hike on July 31 (to 0.25%, the highest since 2008) and a weak US July jobs report on August 2 (114k vs. 175k expected, unemployment rising 0.2%). Yen carry trades, which borrow in low-yielding JPY to invest in higher-yielding USD assets, had become a crowded trade supporting AI mega-cap equities and EM debt. The BoJ action and US labor weakness simultaneously strengthened JPY and raised US recession probabilities, forcing rapid deleveraging.

Markets recovered most losses within two weeks as BoJ Deputy Governor Uchida walked back rate-hike expectations on August 7. But the episode exposed significant hidden leverage in global markets and demonstrated how monetary policy divergence between major central banks can produce synchronized global selloffs. The August 5 session became a case study in how carry trade unwinds cascade across asset classes within hours rather than days.