Risk register · entry
Q4 · Where models dieYen carry-trade unwind
A small BoJ hike unwound the global carry trade; Nikkei's worst since 1987.
The world stops matching the model. Regime change and leverage turn a small error fatal.
Why this room
The carry trade's payoff structure was simple and its historical tail thin, a steady spread collected under models that assumed low, stable volatility, but the BoJ hike and US jobs shock revealed a fat tail the models had not priced, so risk migrated from simple/thin-tail into the complex, correlated, model-breaking territory that defines Q4.
The record
- Bank of Japan raised policy rate from ~0-0.1% to 0.25% on July 31, 2024certain
- US July 2024 jobs report added 114,000 jobs vs 175,000 expected, released August 2, 2024certain
- Sahm Rule triggered in July 2024 (3-month average unemployment 0.53 points above 12-month low)certain
- Nikkei 225 fell 12.4% on August 5, 2024, worst single day since October 1987certain
- TOPIX index fell about 12% on August 5, 2024 (per BIS)certain
- Nikkei 225 lost 4,451 points on August 5, 2024, its largest one-day point drop on recordlikely
- Two-day cumulative Nikkei decline of 18.2% (Aug 2 down 5.8%, Aug 5 down 12.4%)likely
- VIX briefly exceeded 60 in pre-market trading on August 5, 2024certain
- S&P 500 fell roughly 3% on August 5, 2024likely
- Yen appreciated roughly 6% against the dollar in the days around the unwinduncertain
- BIS estimate of the carry-trade unwind at a 'rough middle ballpark' of about $250 billionlikely
- Nikkei 225 rebounded about 10% on August 6, 2024certain
- Mexican peso, Brazilian real, Turkish lira, and crypto assets also sold off in the same windowlikely
Sources
The book
This entry is one of 111 in the register. The full story, and what it cost the people who lived it, is in Risky Business by Claudia Zeisberger, David Munro and Joanna Reijgersberg-Siew.
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