Live: Magnificent Seven lose US$800b in value as recession fears stoke Wall Street sell-off

Japan has been a super cheap place to borrow money – with interest rates at next to zero per cent.

Last week the Bank of Japan raised its key interest rates to about 0.25 per cent.

Investors who have borrowed money to invest in shares that are now declining in value, are now being asked to stump up some cash, and in some cases they’re selling shares in order to do that.

“What we’re seeing now is a lot of margin calls, a lot of forced liquidations, there’s a lot of leverage,” Pepperstone’s head of research Chris Weston told the ABC.

“A lot of retail investors in Japan have borrowed money – they’ve been incentivised to borrow money on leverage, and of course now that the market’s in freefall, they’re having to close those positions.”

The carry trade is also unwinding. It involves global investors borrowing money from Japan (low interest rate environment) and investing it in the United States or Australia (relatively high interest rate environments).

You need to sell yen and buy dollars to do this (an American bank doesn’t want Japanese yen).

As interest rates in Japan have moved higher, investors are selling out of their positions and that involves buying yen.

The higher yen is also causing Japanese stocks to plummet.

“The yen is strengthening significantly, it’s been aggressive, it’s been ferocious, and that’s perpetuated into the Japanese stock market which is priced in yen,” Mr Weston said.

“Everyone’s getting out of carry trades at the moment.”