1. Forced Sellers vs. Optional Buyers This is the main issue
  • The Carry Trader: When the Yen spikes (because the BoJ hiked), these guys are underwater immediately. They aren’t selling U.S. stocks because they want to; they are selling because they are getting margin called. They are forced sellers. They need cash T-minus now. They hit the bid, regardless of the price.
  • The Domestic Buyer: Sure, U.S. rate cuts look good for stocks. But if you're a domestic investor, you aren't forced to buy today. You see the market tanking from the carry unwind and you think, "I'll wait for the bottom."

So you have a flood of "sell at any price" orders and a total lack of "buy right now" orders. That creates an air pocket, and prices freefall.

  1. The 10x Multiplier Carry trades are almost never 1:1 with cash. They are highly leveraged, often 5x or 10x. If a fund unwinds a $1B carry trade, they might have to dump $5B to $10B worth of assets (like U.S. Tech stocks) to pay back the loan. A domestic buyer entering the market because of a 0.25% rate cut is likely buying with cash (1:1). Math: It takes 10 domestic buyers to absorb the damage of 1 carry trader blowing up. The volume mismatch is insane.

  2. Convergence kills the trade You have to remember that the Carry Trade is purely an arbitrage play. It only exists because there is a massive gap (divergence) between U.S. and JP rates.

  • Wide Gap: Free money. Everyone piles in.
  • Gap Closing (Convergence): The free money is gone.

The U.S. cutting rates actually accelerates the pain for the carry trader. It shrinks their profit margin from the U.S. side while the BoJ crushes them on the cost side. It’s not a "meeting in the middle," it’s a pincer movement.

TL;DR: Domestic buyers are walking into the store looking for bargains. Carry traders are running out of the store because the building is on fire. One group is much faster and more violent than the other.