The yen had been the funding-currency of choice for years while Japanese rates sat near zero and other central banks tightened. USD/JPY traded above 160 in July 2024. A Bank of Japan rate increase at the end of that month, combined with weakening US data and expectations of Federal Reserve cuts, compressed the interest-rate-differential from both ends at once.
What followed is the textbook carry-unwind: positions financed in yen had to buy yen back, the move fed on itself, and volatility in an ordinarily quiet pair spiked. The yen appreciated sharply over a fortnight and equity markets fell hard in early August, with Japanese equities suffering their largest single-day fall in decades.
It is a useful case study because nothing broke. The rate gap narrowed by a modest amount in absolute terms, and the crowded positioning did the rest.
Example: a trader short 1 standard-lot of yen via USD/JPY from 161.50 earning roughly 5% annualised carry faced a move to about 142 within a fortnight. That is close to 1,950 pips, around $13,700, against a few hundred dollars of carry earned.
Related: carry-unwind, funding-currency, ninja, flight-to-quality