Is Japan's Carry-Trade Earthquake Over Yet?

This morning, US stocks and bonds were quick to price in Japan's stock market carnage overnight. Tokyo's Nikkei stock price index fell more than 12%, its worst day since "Black Monday" in October 1987, as the yen surged to 142 against the dollar (chart). This time, the crash was in carry trades financed in Japan. In 1987, it was so-called portfolio insurance in the US. The 1987 selloff was a quick one without a recession. Might the current selloff be quick this time without a recession? We think so.

We're closely monitoring, Japan's Topix banks and insurance stock price indexes which plummeted last night (chart). This evening they've rebounded 10.1% and 14.5%. The markets must be figuring that the Bank of Japan won't be in a rush to tighten further given the adverse financial reaction to its recent restrictive stance.