In July 2023, Japan raised its interest rates for the first time in 17 years, moving the short-term policy rate from -0.1% to a range of 0-0.1%. Last week Japan raised it 2nd time to 0.25%. This had significant implications for those who engaged in the carry trade, borrowing Japanese yen to buy US dollars and then investing in US Treasuries.
The interest rate hike in Japan increased the cost of borrowing yen. Carry traders who had previously borrowed yen at very low or negative interest rates found themselves facing higher financing costs.
Carry traders (some) may have losses therefore have pressure to sell assets such as bitcoin and stocks to cover their borrowings.
Last week's bad economic numbers exacerbated the selling.
US dollar weakened recently agaist yen as carry trades got unwound, however weaken US dollar is inflationary.
If selling get intensified, Fed needs to provide liquitidy sooner than later. This is my thought on how Japan's rate increase alone affect US market. There are many more factors. Let me know what you think.
