Japan’s stock market, in particular, was hard-hit by the rapid appreciation of the yen, which undermines the export competitiveness of the country’s manufacturers.
On Monday, the yen hit a seven-month high against the US dollar at around 143. It pulled back Tuesday, down about 1.2% to 146.
The surge in the yen, which started when the Bank of Japan (BOJ) signaled a hawkish tilt in monetary policy in recent weeks, forced many market participants to quickly unwind their yen carry trades, a popular investment strategy.
Decades of extremely low interest rates in Japan have seen many investors borrow cash cheaply there before converting it to other currencies to invest in higher-yielding assets. The undoing of this strategy is the major trigger for the market upheaval, said Stephen Innes, managing partner of SPI Asset Management.
Tokyo “represents the epicenter of carry trade unwinds, where the ripple effects were most acutely felt, exacerbating the turbulence and uncertainty for traders and investors alike,” he said.
On Wednesday, the BOJ raised interest rates for the second time this year and announced plans to taper its bond buying. Traders expect more rate hikes to come later this year as the central bank tries to contain inflation.
“I think (the panic over the central bank decision) has been digested, but there are lingering concerns,” Newman said. “The big question now is will the BOJ follow through with another rate rise given all the criticism in the press. I believe they will and are not swayed by public or press opinion.”