On Monday, August 5, Japanese stocks faced their largest single-day loss in history. The Nikkei 225 index plunged by a staggering 4,451 points, marking a more than 12% decline in just one day.

Neil Newman, head of strategy at Astris Advisory, drew parallels to “Black Monday” in October 1987. “That was a crash. It smelled like 1987,” Newman told CNN.

The Nikkei stock index dropped nearly 12%, briefly weakening the power of the US dollar by nearly 5 yen from the end of July.

The ripple effects were felt across the globe, with Wall Street’s Dow Jones set to open 1,000 points lower. The S&P 500 dropped 3%, its sharpest one-day decline since September 2022, and the Nasdaq Composite fell by 3.4%.

Large tech companies, which had been driving much of the market rally earlier in the year, were hit particularly hard.

The sell-off wasn’t confined to the US and Japan, either. The benchmark for South Korea’s Kospi fell 8.8%, with Australia’s S&P/ASX falling 2.5%.

Analysts believe that another contributing factor to the falling share prices was carry trades. Carry trades are when investors borrow money from a country with low interest rates and a relatively weak currency. Investors then take those funds and place them where they are likely to yield a high return.

As the surge in the financial market has made asset pieces change rapidly in an unpredictable way, a storm is brewing and many investors are trying to take cover.

The US dollar gained against the yen and other currencies because the Federal Reserve raised its own benchmark rate to a two-decade high.

At the same time that high interest rates were helping cool the American economy, the weaker yen helped push higher costs in Japan, which depended heavily on imports of food, fuel, and other necessities.

The Bank of Japan and the Federal Reserve find themselves in a bind as investors panic to pull out to pay off their loans.

Even the cryptocurrency market wasn’t spared. Bitcoin prices fell 14% at one point to $53,789, while ether dropped as much as 21% to $2,390.

Japanese shares showed resilience the next day, with the Nikkei 225 finishing 10% higher and the broader Topix closing up around 9%.

Priya Misra, a portfolio manager at JPMorgan, described the situation as a “market tantrum” driven by fears that the Federal Reserve had been too slow to respond to signs of a weakening US economy.

The unwinding of the yen carry trade significantly contributed to the sell-off. Traders had taken advantage of Japan’s low interest rates to borrow in yen and buy riskier assets.

Adding to market pressure, Warren Buffett’s Berkshire Hathaway disclosed that it had halved its position in Apple during the second quarter while raising its cash position to a record $277 billion and buying Treasuries.

The market turmoil quickly became a political issue. Former President Donald Trump took to Truth Social to criticize the Biden administration and Kamala Harris, labeling the downturn as the “Kamala Crash and Great Depression of 2024.”

Despite the rebound in Japanese shares, the market outlook remains uncertain. The Bank of Japan’s recent interest rate hikes have raised questions about future monetary policy, and the stability of the US dollar against the yen continues to be a concern.

The day after Japanese stocks crashed, shares rebounded the next day to claw back some of the losses from the previous day.

The mini-crash of Monday’s market sessions seemed to be a result of a combination of fears surrounding the slowdown of the US economy, rising Japanese interest states, and the crumbling tech stock.

In the US, stocks were set to open higher. S&P 500 futures were up 0.4% and Nasdaq futures were up 0.3%.

Neil Newman, head of strategy at Astris Advisory in Tokyo, told CNN that a bounce in the Japanese stock market is “typical after a market crash.”

The short-term crater in the stock market sparked a conversation regarding the US dollar and the Japanese yen. While “it is too early to conclude that the Japanese stock market has hit a bottom,” analysts from UBS Chief Investment Office wrote in a research report Tuesday, they note that things will shift again.

However, the fear of a US recession is still lingering throughout the US economy. The rapid trades involving the yen sent global markets into a tailspin. Who would say something like this won’t happen again?