Markets across the world came under a bout of bear hammering on the 5th August. US unemployment which had fallen to a new set of lows, began edging up again and inflation pressures eased. All of this contributed to the sell off, but the key reason was the unwinding of the yen carry trade - which involves borrowing in yen at minimal cost and investing in higher yield assets overseas. 

This strategy adopted by punters worked very effectively over the course of the last decade, as the yen continued to weaken. But now, as the attached paper explains, the situation has turned upon its head. The Bank of Japan has started to increase interest rates and over the coming two or three years the yen is likely to strengthen. The carry trade has begun to reverse. Going forward, this will create market volatility across the world, as well as a correction in asset prices. Liquidity is bound to be affected.