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Dear reader,
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a turbulent week is behind us. On Monday, Japan's leading index, the Nikkei 225, shocked global stock markets by dropping over 12%. Such a significant daily loss hasn’t occurred since Black Monday in October 1987. The cause of this drop was attributed to so-called "carry trades," which are currency transactions executed by professional investors.
The principle behind carry trades is straightforward: An investor borrows money in a country with low interest rates (in this case, Japan) and invests it in another currency with higher interest rates (such as the US dollar or the euro). The investor then profits from the difference in interest rates. This strategy had been working well for many months, as the yen continued to depreciate and Japan, unlike the USA or Europe, maintained its zero interest rate policy.
The problem? The previous week, the Bank of Japan announced that it would be raising its key interest rate. This caused the yen to appreciate, reducing the interest rate differential between Japan and the USA. As a result, carry trade investors were forced to close out their positions to avoid further losses, leading to a sell-off of securities. This triggered a domino effect, particularly in Japan, causing the Nikkei 225 to plunge. However, the situation appears to have stabilized for now as the week progressed. But of course, the future remains uncertain.
What should you do now? The most important thing is to stay calm! Stock markets tend to recover from crises over the long term, and lower prices can present a good opportunity to invest, especially during the savings phase.
Best wishes,
Your justETF team
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