Asian markets were wrenched lower today as confidence in the American consumer disintegrated overnight and important hedge funds braced themselves for a slew of redemptions over the next 12 hours.

Currency markets were also gripped by turmoil as the yen surged against all significant currencies.

Traders described the moves as representing “a massive bailout from the yen carry trade” – the pattern of investors cheaply borrowing Japanese currency to finance global investments.

Despite the chaos driven by credit-related fears, the Bank of Japan (BoJ) drained massive amounts of liquidity from the money market on Tuesday.

BACKGROUND

• Elephant slumps in wake of crunch

• Heads on the block, investors call for change

• Credit crunch forces Delek to leave property deal

• US rate cut looks certain after new data

• Bank of America to axe 3,000 after 'our errors'

BACKGROUND

• More pain for private equity industry

• Russian state bank poised to boost liquidity

• House prices‘to stay flat for years’

• Will soaring oil pump up inflation?

• US bank slump goes on

Black clouds loom on horizon

For the first time in 15 years, I am seriously worried about the outlook for the economy, the housing market and sterling

Float on the job market

Don't believe the scary headlines. It's not the worst time to consider a career in banking

Related Links

• Profit warning by US retail giants

• Bank of Japan switches tack as overnight rate tumbles

• New rate debate as Japan's growth slows

It sucked 1.5 trillion yen (£6.5 billion) of cash from the system in an effort to bring Japan’s overnight call rate back into line with the BoJ’s target rate of 0.5 per cent.

Even amid the equity market carnage, dealers said that they were able to identify a series of “red alert” trading anomalies suggesting that several major hedge-funds – which are thought to be the prime exploiters of the yen carry trade – had hit crisis points and had become emergency sellers of liquid Japanese shares.

Most hedge funds require investors to give a 45-day notice period on large redemptions.

“For investors keen to secure some capital this quarter before the end of September, today represents the last opportunity to get out,” one Mizuho Securities trader said.

“Looking at a lot of today’s trades, it is pretty obvious that there were funds responding to some pretty hefty redemptions.”

In Japan, the Nikkei 225 index of blue-chip shares fell 2.1 per cent to hit a nine-month low in a rout that was led chiefly by banking stocks.

The big financial houses used the market lull on Tuesday to reveal their estimated exposure to the US sub-prime crisis.

Although the figures issued by the megabanks were far lower than many analysts had feared, panic surrounds the entire sub-prime issue, and when the banks said that they were likely well-insulated from the chaos in the US and Europe, investors did not give them the benefit of the doubt.

Also behind the dumping of banks' shares were Monday’s disappointing gross domestic product figures.

With economists now broadly dismissing the chances of the Bank of Japan raising interest rates this month, one of investors’ chief reasons for holding financials stocks has temporarily evaporated.

Equally potent, and driving down shares across Asia, is the growing fear that the US consumer is a diminishing force for growth.

Wal-Mart’s profit warning sounded a chilling note for Japanese, Korean and Taiwanese exporters, whose sales to the US have strongly supported their respective markets.

Toyota and other carmakers joined a list of heavily battered consumer electronics manufacturers as the panic spread.

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