How Cheap Borrowing in Japan Made the August 2024 Market Selloff Worse

In early August 2024, a trade built on cheap Japanese borrowing came under pressure. The yen was strengthening just as share markets were falling, leaving some investors with investments worth less and loans that cost more to repay from another currency. As they closed those trades, the selling added to turmoil across markets.

This was the yen carry-trade unwind. To understand why it mattered beyond Japan, follow the money from the original loan to the moment the borrower needed to repay it.

The everyday picture of a carry trade

Suppose a trader can borrow yen at a low interest rate, convert it into another currency and invest where the expected return is higher. The hope is that the investment earns enough to cover the loan interest and other costs, leaving a profit. Borrowing in one currency to seek a higher return in another is a carry tradeCurrency carry tradeA carry trade borrows in a currency with low interest rates and invests in assets that pay more. It earns the gap while the exchange rate holds, but a rise in the borrowed currency makes the loan costlier to repay.View topic and related stories. Japan’s low interest rates made the yen a popular source of funding for it.

Here is a hypothetical example using rupees to make the amounts familiar. A trader borrows ¥10,00,000 and converts it into ₹5,50,000. If the investment earns 6 percent over a year, it makes ₹33,000. The trader still owes interest on the yen loan, so the profit would be less than that, even before fees and taxes. The example assumes no protection against currency changes. These invented rates explain the calculation; they do not describe a real trade or suggest a borrowing route for Indian savers.

The crucial detail is that the loan must be repaid in yen. Suppose the yen strengthens and buying the same ¥10,00,000 now costs ₹6,00,000. The amount borrowed has not changed, but repaying the principal alone takes ₹50,000 more than the trader originally received. The ₹33,000 investment return cannot cover that increase, let alone the loan interest.

That is the risk of foreign-currency debtForeign-currency debtDebt owed in another country's currency becomes heavier in local terms when the local currency falls. Borrowing without protection against this (unhedged) is riskier when it is short-term.View topic and related stories: what looks like cheap borrowing can become expensive to repay. The exchange rateExchange rateAn exchange rate is the price of one currency in another, such as rupees per US dollar. When it takes more rupees to buy a dollar, the rupee has weakened against the dollar.View topic and related stories, the price of one currency in another, can outweigh the advantage of the lower interest rate.

Why borrowed money makes the ride rougher

The example above gave the investment a positive return. But what if its value falls while the yen rises? The trader then faces pressure from both sides: less money coming back from the investment, and more needed to buy the yen for repayment.

Borrowing also makes an investment loss larger relative to the trader’s own money. Suppose a trader invests ₹1 lakh of their own money and another ₹1 lakh borrowed. A 10 percent fall in the ₹2 lakh investment costs ₹20,000, which is 20 percent of their own ₹1 lakh. The debt still has to be repaid. This hypothetical calculation ignores interest and illustrates leverageLeverageLeverage is using borrowed money to hold more assets than your own capital could buy. It magnifies gains and losses, so a small fall in asset prices can wipe out a large share of capital.View topic and related stories: using borrowing to invest more than your own money could buy.

A borrower may not be able to wait for prices to recover. Lenders and trading platforms can require marginMarginThe part of a purchase's value that a borrower must put in with their own money. A loan without margin lets the borrower take larger positions with less of their own cash.View topic and related stories, money or collateral held against possible losses. If losses increase, the trader may be asked for more collateral. That demand is a margin call. Someone unable to provide it may have to sell investments to raise cash, even if they would otherwise prefer to keep them.

When many traders face that demand together, their selling can push prices lower and create further losses. Other traders may then face margin calls of their own. This kind of forced-selling cycleFire saleA fire sale is a rushed sale of assets at low prices, often by a seller under pressure to raise cash. It can push prices down further and strain other holders of similar assets.View topic and related stories helps explain how borrowing can turn an initial price fall into a much larger one.

What changed in Japan and the United States

At the end of July, the Bank of Japan raised its short-term policy interest ratePolicy interest rates and market ratesCentral banks set policy rates that influence borrowing costs and market yields, but the rates are not identical.View topic and related stories to around 0.25 percent and announced plans to reduce its government-bond purchases. The rate was still low, but the direction mattered: a trade built around cheap yen funding now faced the prospect of tighter borrowing conditions.

Then a weaker-than-expected US jobs report raised concerns about American growth. US shares fell on Friday 2 August, while investors reassessed the likely path of interest rates. These developments came as the yen was strengthening, putting pressure on trades funded by yen borrowing.

For a trader in that position, the original plan was becoming harder to sustain. Selling could limit further losses and free money to repay the loan, but doing so required reversing the trade: sell the investment, convert the proceeds back into yen, and repay the borrowing. That reversal is what an unwind means. When many investors try it together, selling pressure on investments comes alongside extra demand for yen.

Monday 5 August: selling spreads beyond Japan

By Monday, the selling had intensified. The yen rose further and Japan’s TOPIX share index fell by more than 10 percent. An indexStock market indexAn index is a single number that tracks the prices of a chosen group of shares. It is used to describe how a market, or part of it, has moved.View topic and related stories tracks prices across a selected group of shares; its decline showed how widely the pressure was being felt in that market. Indian equities also came under pressure during the early-August turmoil.

The Bank for International Settlements (BIS), which works with central banks, later described weak US data as the initial trigger and leveraged positions as an amplifier. In other words, the jobs report helped unsettle investors, while borrowing and the closing of trades made the reaction larger. A trader selling to meet a cash demand is adding to market supply regardless of whether the underlying company’s business has changed.

The stress did not last at that intensity. On 7 August, a Bank of Japan deputy governor said the bank would not raise its policy rate while financial markets were unstable. The BIS reported that markets stabilised and recovered losses within days, helped by more reassuring data and central-bank communication. That quick recovery describes this episode; it does not mean every forced selloff reverses as quickly.

What carry trades can explain—and what they cannot

A carry-trade unwind explains how pressure in a currency market can lead to selling elsewhere. It does not establish that every seller was repaying a yen loan, or that carry trades caused the whole decline. The BIS identified the unwinding of leveraged positions as something that amplified the market moves.

Measuring the full size of carry trades is difficult because they can be arranged in different ways and the available data do not capture them all. That uncertainty also limits attempts to assign an exact share of the selloff to them. The useful conclusion is about the mechanism: falling asset prices, currency moves and demands for cash can reinforce one another.

What it meant for India

Indian markets were affected too. The RBI’s later review linked early-August volatility in Indian financial markets to a combination of the Japanese rate rise, weaker US data and Middle East tensions. The connection did not require every Indian investor to have borrowed yen. Global investors hold assets across countries, so a need to reduce borrowing or raise cash in one place can affect what they sell elsewhere.

That spread of pressure is financial contagionFinancial contagionContagion is the spread of financial concern or stress from one institution or market to others. Timing alone does not prove causation.View topic and related stories. Imagine an investor holding shares in several markets who suddenly needs cash. They may sell an investment they can readily sell, even if the company behind it has reported no bad news. This is a hypothetical explanation of the channel, not evidence that a particular Indian stock was sold to repay a yen loan. The sources here do not establish large yen carry-trade positions held by Indian investors.

For someone holding Indian shares or an equity mutual fund, the distinction matters. Their holdings can fall in market value without a corresponding change in the companies’ reported earnings. Selling pressure and changing expectations of future profitsMarket expectations and surprisesShare prices usually reflect what investors broadly expect. A known outcome can still move prices if it differs from those expectations, so the surprise often matters more than the news itself.View topic and related stories can both affect what buyers will pay, while the index itself cannot tell us which mattered most on a particular day.

The RBI also described the market recovery as expectations of US rate cuts strengthened. Those changing conditions mattered alongside the pressure from investors reducing borrowed positions.

Lessons

• A cheap loan can carry an expensive currency risk. The interest rate is only part of the cost when repayment must be made in another currency.
• Borrowing changes both the size of a loss and the ability to wait. A margin call can force a sale before the investor wants to exit.
• Selling can travel across borders. An investor’s need for cash can affect assets far from the source of the original problem.
• A market fall can have several causes. In August, weak US data and changing rate expectations met leveraged positions; the evidence does not divide their effects precisely.

Sources

Examples with invented rates are labelled and do not describe real trades.

Show 5 sources

1. Bank of Japan, “Change in the Guideline for Money Market Operations and Decision on the Plan for the Reduction of the Purchase Amount of Japanese Government Bonds”, 31 July 2024Accessed 19 Oct 2026 · Supports: the 7–2 vote, the policy rate of around 0.25 percent from 1 August 2024, the bond-purchase reduction plan, and the stated reasons.
2. Bank of Japan, “Japan’s Economy and Monetary Policy” (speech by a Deputy Governor, Hakodate), 7 August 2024Accessed 19 Oct 2026 · Supports: the statement that the Bank will not raise its policy rate when financial and capital markets are unstable.
3. Reserve Bank of India, “Monetary Policy Report – October 2024”, 9 October 2024Accessed 19 Oct 2026 · Supports: the RBI’s account of the yen carry-trade unwinding, influences on Indian equities, the rupee’s 0.5 percent depreciation over March–September 2024, and net foreign portfolio equity purchases of ₹0.82 lakh crore in H1 2024–25.
4. Bank for International Settlements, “Carry off, carry on”, BIS Quarterly Review, September 2024 (16 September 2024)Accessed 19 Oct 2026 · Supports: the definition of a carry trade, the sequence of 2–5 August, TOPIX and TOPIX banks moves, VIX figures, the speed of recovery, and the caveats on measuring carry trades.
5. Bank for International Settlements, “The market turbulence and carry trade unwind of August 2024”, BIS Bulletin No 90, 27 August 2024Accessed 19 Oct 2026 · Supports: the ¥40 trillion (US$250 billion) rough estimate, procyclical deleveraging and margin increases, and the role of leveraged trades in amplifying the reaction to US data. The full PDF text could not be retrieved; only the page’s published key takeaways were read.