Global stock markets are sliding as Japan suffers biggest fall since 1987

• Japan's main stock-market index sunk 12.4% on Monday, while US stock futures were also lower.
• The Nikkei 225 suffered its biggest decline since October 1987.
• Investors are fretting about Japan's interest-rate hike and the US economic outlook.

Wall Street opened sharply lower on Monday, and Japan's main index suffered its biggest fall since 1987 amid a global market rout.

The sharpest sell-off since " Black Monday " sent the Nikkei 225 sinking 12.4% lower, compounding a 5.8% fall on Friday.

The declines were sparked in part by Japan's interest-rate rise last week that strengthened the yen against the dollar, as well as factors including disappointing US jobs numbers on Friday.

US stock markets sunk at the end of last week as investors digested a streak of negative economic data and disappointing earnings from Big Tech companies.

The S&P 500 fell 3% in just two days, while the tech-heavy Nasdaq Composite shed nearly 5%, putting it in correction territory .

The S&P was down more than 3.5% at Monday's open, with fewer than 50 stocks in positive territory, while the Nasdaq slumped more than 5%. The Dow Jones Industrial Average sank more than 1,000 points, or 2.6%.

Big Tech stocks took a battering, with Apple down close to 5% and Nvidia falling 7.6%.

And the VIX, or "fear index," which measures expectations of US stock-market volatility in the coming month, jumped sharply on Monday.

"We haven't seen a day of carnage like this, really, since the COVID sell-off back in February, March 2020," Tony Sycamore, an analyst at IG Australia, told Bloomberg TV.

South Korea's KOSPI closed 9% lower after a trading halt earlier in the day, Taiwan's Taiex fell 8.4%, and Australia's ASX 200 ended Monday 3.7% lower.

India's Sensex and the Nifty 50 both closed about 2.7% lower.

Hong Kong's Hang Seng Index fell as much as 2.8%, and China's CSI 300 dropped as much as 1.3%. The Chinese stock markets were already under pressure this year because of the country's economic troubles.

In Europe, the regionwide Stoxx 600 fell 2.5% as trading got underway on Monday.

Paris was down 2.4%, Frankfurt shed close to 3%, and in London, the FTSE 100 fell by more than 2%.

Bitcoin tanked 14% over the past 24 hours.

The negativity in US stocks ahead of the week's opening came after a recent sell-off in tech stocks as euphoria over artificial intelligence fizzled, with investors questioning when they would see returns.

A weak July jobs report from the US added to investor gloom, sparking a sell-off in US stocks on Friday, just days after the Federal Reserve kept interest rates steady again.

But it's not just the US economy and the Fed weighing on the markets. It's also about Japan's interest-rate hike on Wednesday, which IG's Sycamore told Bloomberg TV was "the straw that broke the camel's back."

Global carry trade unwinding

The Bank of Japan raised its interest rate from between 0% and 0.1% to 0.25% on Wednesday — the highest level in 15 years.

The increase appears small, but it matters because the yen has been the focus of carry trade, where traders profit from a divergence in interest rates across the world. Since the turnover in global foreign-exchange markets is massive — it reached a record $7.5 trillion a day in April 2022, a triennial survey found — the fallout can be huge.

Japan kept interest rates ultralow for decades following the implosion of an asset bubble in the 1990s that contributed to persistent deflation. It continued holding rates low after the pandemic, in contrast to major central banks that started hiking them.

This created a divergence in monetary policy that affected the Japanese yen , which sank to a near four-decade low against the strong US dollar last month.

This divergence helped the carry trade, which has been a dominant investment strategy this year.

ING analysts said it involved "borrowing cheaply in yen — on the expectation that the yen will continue to fall — and investing in some high-yielding currency or asset preferably backed by a strong macro argument."

However, this strategy has hit a snag, as the Bank of Japan's rate hike last week sent the yen up — it's 7.5% higher over the past five trading days and 1.6% lower against the dollar so far this year.

On Monday, the yen rose as much as much as 3.3% to 141.7 per dollar, a level last seen in January.

The bank's rate hike has also fueled further risk-off sentiment in global stock markets.

"The unwinding of yen shorts is undoubtedly contributing to the global risk-off environment," ING analysts wrote in a separate July 25 note.

There are still choppy waters ahead, particularly for risk assets, Vishnu Varathan, Mizuho Bank's chief economist of Asia excluding Japan, said on Friday.

"The dark clouds of adverse feedback loop between 'carry' liquidation and 'risk off' contagion cannot be ignored," he added.