Asian stock markets suffered a panic-stricken pummelling on Thursday as the global sell-off tracked the sun around the world and continued Wall Street’s spectacular rout the previous evening.

But even as stocks were tumbling, focus was firmly on the currency markets, which many believe now hold the key to Asia’s chances of resilience to the coming storm. Brokers in Tokyo warned of the “wildfire devastation” being caused by the unwinding of the yen carry trade — the investment practice where the Japanese currency was borrowed on a monumental scale to finance investments around the the world.

With job losses, production slowdowns and profit warnings setting the mood, major indexes in Japan and Hong Kong plunged by around 5 per cent each: the collapse was most acute in Seoul where the Kospi Index shed around 8 per cent of its value shortly after the opening. In an increasingly desperate effort to calm the situation, the Seoul stock exchange authorities suspended programme trading as an anti-volatility measure.

Worries about a global recession and the impending horrors for Asia’s export-driven industrial engines continued to dominate the market theme. But trading floors in Tokyo said that the unwinding of the yen carry trade was emerging as the next, perhaps even more potent, trigger for panic.

For some years, Japan’s low interest rates have proved an extremely attractive temptation to the leverage-hungry: hedge funds, buyout merchants and other investors borrowed yen cheaply, then sold those yen in favour of whatever currency their next investment would be in — often US dollars but the euro and sterling were also favourite targets of the trade. Because of its popularity, the carry trade kept a firm lid on the yen, systemically driving it down and, inadvertently, making Japanese exports attractive because of the weakness of the currency.

But as hedge funds implode and investors everywhere race to offload their investments and pay back their yen loans, the trade has reversed and is rocketing the yen higher. Today, it hit a level of 97 yen against the US dollar, and has surged by around 30 per cent against the pound within the past couple of weeks.

Although currency analysts at Nomura said that the unwindin of the carry trade does not impose unlimited upside on the yen, they gave warning that it would badly hurt the competitiveness of Japanese exporters at a critical time.

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