This column had warned readers almost exactly a month back that a rise in the value of the yen could spell trouble for the stock market. While there are no hard numbers, anywhere up to a trillion dollars could be at stake in the yen carry trade, wherein investors borrow in Japan at cheap interest rates and recycle the money into global equities, often through extra leverage.
The yen carry trade could now be unravelling, forcing its users to sell equities and pay back their yen borrowings. The yen is now at a three year high and equity markets across the world have plunged in tandem with the rise in the Japanese currency. While there is nothing resembling a general global financial crisis as yet, investors would do well to keep a close watch on the swings in the currency markets.
A lot of the money that has flowed into Indian equities in recent months has come from hedge funds. So this could be more serious than a mild correction.