Yen carry unwind week: Nikkei -12%, VIX to 65, August 5 crash

The week of August 5-9 2024 delivered the first major cross-asset shock since March 2023, driven by the unexpectedly hawkish BoJ rate hike on July 31 and the weak August 2 NFP print triggering the Sahm Rule. Entering the week, Japanese yen carry positioning had built to multi-year extremes, with USDJPY near 160 and short-vol strategies crowded. Monday August 5 delivered the unwind: the Nikkei 225 dropped 12.4%, the worst single-session since the 1987 crash.

US markets compounded the damage. The S&P 500 opened down 4% but buying came in by midday. The session saw VIX open at 65 (from 23 at Friday close), a 3-standard-deviation move that reflected forced unwinds in volatility-targeting strategies. By close, the S&P had recovered to -3.0% from the intraday lows. The 2Y Treasury yield fell to 3.88% (from 4.20% pre-NFP), pricing nearly 50 bp cuts at the September FOMC.

The balance of the week saw a sharp recovery as forced-selling pressures eased. By Friday, the S&P 500 was nearly unchanged on the week. The episode was a textbook positioning-driven crash: no fundamental recession signal was confirmed, but the concentration of short-yen, short-volatility, and momentum-long trades created a liquidity vacuum that amplified the initial shock. The Fed's response at Jackson Hole August 23 and the 50 bp cut September 18 reflected the lessons of the week.