There are only two days left until Japan raises interest rates. Recently, there has been a particularly popular image online that says the market fell by 31% after the last three interest rate hikes in Japan. However, after careful study, I found that it is not that simple, and it cannot be solely attributed to the reversal of carry trades. Below, I will share my analytical thoughts with everyone.
For carry trades to completely reverse, two key conditions must be met: first, there must be expectations of a recession in the United States, and second, Japan must continue to raise interest rates. Why do I say this? If the U.S. economy does not go into recession, the annualized return of U.S. stocks can exceed 10%, and Japan's interest rates cannot attract capital back. These two conditions are important references for judging the general direction and are also key reasons why the market was able to recover in the past few instances. The previous three market crashes were not solely caused by carry trades, and I will explain this in detail later.