Investors lent Japanese Yen to invest in Bitcoin and Nvidia – But then Japan raised interest rates

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Last Updated on 13 August 2024 by CryptoTips.eu

Now that the dust from last week’s stock market storm has settled, analysts are wondering what exactly happened. An investigation by several media behemoths found that the main culprit appears to have been the so-called ‘Yen Carry trade’, in which investors borrowed money in Japanese Yen (with an interest rate close to 0) and then invested that money in things that did very well, such as the American chip maker Nvidia or the largest digital coin, Bitcoin. A fairytale that continued until the Japanese central bank did the unexpected and raised interest rates. Then it all came tumbling down.

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1999

At the end of the 1990s, the Japanese stock markets had been dropping for a decade or so. At that moment, the Japanese Central Bank started an experiment that lasted two decades, namely zero interest rates. Whatever happened, interest rates in Japan remained very low or were simply set at 0.

Ever since 2013, the ‘Yen Carry Trade’ therefore became very popular among Western investors. The logic goes like this: if you know that a certain investment will yield 5% per year (the average profit on the S&P500 over the last twenty years, for example), you borrow in Japanese Yen at an ultra-low interest rate and pocket the difference as profit.

So, for example, you pay 2% on your loan to earn a profit of 5%. The difference, 3%, is yours.

Since the beginning of this year, investors saw that Nvidia and Bitcoin were doing very well, so more and more money was borrowed (in Japanese Yen) to invest in those two investments (Nvidia shares and a Bitcoin ETF).

0.25%

The turning point came on July 31, when the Japanese central bank raised interest rates from 0 to 0.25% for the first time since 2007. The Japanese Yen suddenly strengthened against the US dollar. Investors rushed to reassess their loans as their repayments suddenly became more expensive. On top of that, Bitcoin had not been doing well for several months, and even Nvidia experienced a dip.

That information, combined with a bad jobs report from the United States on Friday, August 1, set off a huge movement that resulted in a lot of phone calls and emails to Japanese banks canceling loans over the weekend of August 2 and 3.

The Japanese Yen Carry Trade was suddenly a lot less popular and the Asian stock markets reacted accordingly when they reopened.

On Monday, August 4, the markets reopened and Japan’s stock market crashed with a massive plunge. Bitcoin and Nvidia were also hit hard that day. Since then, the dust has settled and everything seems a little more normal again.

Jeroen Kok

Jeroen is one of the lead copywriters on Cryptotips.eu and discusses all recent events in the crypto market. This includes news updates, but also price analyzes and more. He developed his passion for cryptocurrency during the bull run in 2017. He has learned a lot since then. The combination of cryptocurrency and creative writing is perfect for Jeroen and an excellent way to share his knowledge with a wide audience. Find me on LinkedIn / [email protected]
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