I’ve simplified the two possible reasons behind the recent sell-offs in the US and Japan (note this is a massive simplification on my part):
1) Bank of Japan’s (BOJ) Hawkish Comments: The BOJ’s recent hawkish comments led to Yen appreciation, causing the unwinding of long-standing carry trades (short Yen, long Nasdaq). Japan has net overseas investments of $3.3 trillion.
2) Large AI Spending and Weak Labor Numbers in the US: Comments from US tech giants about large AI spending without a clear ROI, combined with weak July labor numbers, have raised fears of a US recession. This has led to concerns about the Federal Reserve’s rate reduction strategy, which in turn is dragging down Japan’s market.
How to Calm the Markets Under These Scenarios
1) BOJ Intervention: The BOJ could talk down the Yen, as the recent 15% appreciation was too rapid.
2) Positive US Economic Data: Providing statistics that show the US economy is not in recession could help stabilize the markets. Weak Job data for July and a downward revision for June numbers are just two months data.
Either way, a reversal could occur in due course. Again, please don’t be offended by this simplified picture of potentially very complex market dynamics.
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