The yen’s overnight surge against most major currencies has dealt a massive blow to Japanese individual investors and, said forex analysts, “raised a huge red flag” over the future of the yen-carry trade.

Private equity has completed virtually no sizeable deals in Japan and stock prices have not been inflated by expectations that it will do so soon. An unwinding of private equity financing should not therefore hit Japanese stocks in the same way as it might US or UK equities.

Japanese housewives – online currency day traders who borrow yen to create huge trading positions and have become one of the most potent global forces in forex trading – awoke on Friday morning to discover that overnight dealing on New York and London had completely destroyed all the gains made over the past six months.

Desperate to claw back some profits, individual Japanese investors traded furiously throughout Friday, using the yen’s strength as an opportunity to sell it hard against Australian and New Zealand dollars, sterling and a basket of other popular overseas currencies.

But within minutes of London trading beginning in earnest, the market once again turned against them. Currency brokers at Nomura described the switch as a “hard smack” for Japanese individuals.

The director of one of Japan’s largest online currency trading brokerages told The Times that Friday’s carnage was just the beginning of a global rout of the yen carry trade.

“Our customers who have slowly developed a taste for risk have found themselves wiped-out in a single night’s action in London and New York. Individual Japanese investors will now try to fight the market en masse – it will be the housewives and their trillions of yen against the rest of the world – but the rest of the world will probably win.”

Currency analysts described London and New York forex trading as “highly irrational” where the yen is concerned. This Sunday will see a critical Upper House election in Japan and all the polls point to a heavy defeat for the ruling LDP party and the possible resignation of the Japanese Prime Minister, Shinzo Abe. Even the most conservative pundits predict months of acute political turmoil in Asia’s largest economy, and what would, under normal circumstances, be a trigger for heavy selling of the yen against the US dollar, euro, and sterling.

The currency volatility was partly responsible for Friday’s heavy plunge in Japanese stocks. Led by the country’s largest exporters – the chief beneficiaries of the long-term weakness of the yen – shares collapsed as investors panicked that earnings would be hit hard.

Several analysts condemned Tokyo’s sharp stock market falls as “wrong-headed, knee-jerk stuff by nervous investors.” Corporate Japan has been uniquely hostile to private equity, and been by far the most aggressive in raising its defences against the possible onslaught of takeovers.

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