With share prices plunging, high anxiety on Wall Street and talk of emergency rate cuts in the US, it has been a dramatic week for the markets – and the millions of savers who rely on them for an investment return.
What would have been a small bump of turbulence turned into full-blown panic as an obscure type of currency trading imploded on the other side of the world.
The result has left anyone from ordinary people dabbling in investing to large pension funds feeling sore and looking for ways to make back money in the chaos.
In the UK where recession fears have faded after last year’s downturn, some economists even started warning the upheaval was a threat to growth.
The root of the problem is an investing gambit that few will have heard of – the yen carry trade.
A complex way for investors to make money, it has led to the build-up of hundreds of billions of dollars in Japan.
“Basically, a lot of investors – some Japanese, many international – would borrow money in yen at a very low rate to invest in other countries where yields are higher,” says Andres Sanchez Balcazar, head of global bonds at Pictet Asset Management.
Anyone taking out a mortgage or loan in the UK or the US will be well familiar with the pain of interest rates hovering around 5pc. But in Japan you can still borrow money almost for free.
As a result, investors such as hedge funds and investment banks have taken out large debts there. They then exchanged the yen they borrowed into another currency where interest rates are higher, such as US dollars or Mexican pesos.
“A carry trade is essentially just trying to benefit from a higher interest rate in one area, funding it out of a low interest rate environment in another. Carry is just another word for interest really,” says M&G fund manager Tristan Hanson.
Typically, a trader then just lets the investments “sit and benefit from the short-term money market rate in each of these currencies”, Balcazar says.
“Some people juice it up a bit. In its more speculative version, it would be going into for example corporate or emerging market bonds or sometimes equities.
“Maybe some of it found its way into tech equities, which everybody thought would just go up forever.”
This means an investor with a bigger risk appetite may have borrowed money in Japan, exchanged it into dollars or pounds and used it to effectively lend money to Sainsbury’s, buy Ghanaian government bonds or purchase shares in Apple.
“That all goes fine and well as long as the yen depreciates,” says Balcazar.
Last month Donald Trump raised the temperature for investors watching the money roll in. He suggested in an interview that the dollar was too strong against China and Japan’s currencies, leaving US manufacturers struggling to sell their products.