๐ฅEntire world market downturn is related to the Japanese currency, Yen. Here's the sequence of events: Nothing to do with Israel - Iran war..๐ฅ
1. Two weeks ago, the Japanese Yen was trading at 165 Yen per 1 USD (i.e., 1 USD = 165 Yen).
2. For over 30 years, Japan has maintained zero interest rates (even on loans, there was zero interest).
3. Many organizations, funds, and hedge funds took advantage of this by borrowing large amounts from Japan and investing it in the US markets (double benefit of zero interest money and the dollar always appreciating against the Yen).
4. Additionally, since the investment was substantial, most hedge funds also shorted the Yen to hedge their positions (similar to selling call options for easier money).
5. Everything was going smoothly; people had been making free money for years, and this is why Japan is the largest investor in US markets due to its zero-interest money.
6. What changed? Last week, the JCB (Japan Central Bank, similar to RBI in India) decided to raise interest rates by 25 bps after almost 30+ years. And from here, everything changed.
7. Now, zero interest money is no longer zero interest, and there is an additional cost on all your existing loans. Hence, most of the funds that had taken this free interest loan and invested it in the US market started selling off everything to get the money and close the loan (because the US market was already overbought and now these loans no longer had zero interest)
8. Due to the increase in interest, the Yen started appreciating against the dollar, reaching 1 USD = 145 Yen (this was a significant increase in currency value in just 2 days).
9. Now, most of the people who had shorted the Yen (as mentioned in point 4) had to cover their positions because the Yen appreciated significantly in just 2 days. Their call options, which were in between, started moving wildly like the Sensex.
10. Now imagine you took a loan in Yen when 1 USD = 165 Yen and invested it in the US market. Suddenly, 1 USD = 145 Yen, so regardless of your returns, you have a direct cross-currency loss of 13%. (Assume you took a loan of 16,500 Yen which was equal to 100 USD, and now 16,500 Yen is equal to 113 USD. Even if there is no interest, you have a direct loss of 13% due to the Yen appreciating.)
11. In such a scenario, wouldn’t you sell everything to save yourself? What is the solution to this situation?
The simple solution is that the US needs to lower its interest rates to counter this. If a mountain is formed somewhere, it has to be countered elsewhere. If the mountain is in Japan, the US will have to act.
*The Indian market suffered primarily due to heavy selling by Foreign Institutional Investors (FIIs) as a result of the panic in Japan and the US.*
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