The 'Global Storm Eye' Japan: The stock market collapsed so badly, what unknown black swans are there?

In this week's "historic" financial storm, Japan is undoubtedly at the center of the storm. In less than a week, Japan has completely overturned global market and economic expectations.For over a year, Japan has been the darling of the global markets, with the depreciation of the yen driving the stock market to historic highs and reigniting inflation after decades of deflation. However, this situation underwent a disruptive change this week, as the Bank of Japan raised interest rates, causing the Nikkei 225 index to plummet over 12% on Monday, marking the largest drop since 1987, but rebounding by 10% the next day.In the face of this drastic turmoil, Morgan Stanley warned that there may still be "black swans" in the market that are unknown, as without incidents such as war, epidemics, natural disasters, or financial crises, it is unusual to see such massive sell-offs in the Japanese stock market in recent days.Behind the brutal sell-off in the Japanese stock market, what unknown "black swans" may emerge and what impacts will they bring?Firstly, the rebound of the yen has disrupted one of the most profitable market strategies this year, "arbitrage trading." The yen's rebound has triggered profit-taking and position unwinding in these trades, further exacerbating the yen's appreciation. Wei Li, Global Chief Investment Strategist at BlackRock, stated:Compared to previous rapid unwinding of arbitrage trades, the massive reaction in Japan this time indicates that there are factors in Japan more concerning than economic recession, which could have global implications if this situation persists.This intense volatility may also have profound effects on Japanese politics and households, as market turmoil could affect consumer confidence and Japan's efforts to escape deflation. Hirofumi Suzuki, Chief Foreign Exchange Strategist at Sumitomo Mitsui Banking Corporation, stated:The risk is that, as market uncertainty increases, consumption and investment will be restrained. If this situation continues, it could affect corporate behavior and households.What's even more troubling for investors is that BOJ Deputy Governor Shinichi Uchida stated on Wednesday that as long as the market remains unstable, there will be no interest rate hikes, leading to the yen depreciating by over 2% again. This indirectly acknowledges that the central bank's rate hike last week was a "disastrous" policy mistake. Takuji Aida, Chief Economist at Crédit Agricole CIB, stated:Some believe that the Bank of Japan's actions were a mistake and influenced by political pressure, as in recent weeks some prominent politicians have openly criticized the weakening yen. This could jeopardize the relationship between the Japanese government and the central bank, and affect Prime Minister Fumio Kishida's efforts to compete for leadership of the ruling party next month.In this great turmoil, everything is being overturned, and the only strategy is to abandon the strategies that have been used for so long.Stephen Miller, Advisor at Grant Samuel Funds and former BlackRock Fund Manager, stated:There is no doubt that this is a new territory for the market. With the Bank of Japan seemingly determined to break free from years of zero or negative interest rate policies, all aspects are now undergoing profound reflection—stocks, bonds, yen, credit, everything. The only strategy now is to discard the strategies you have been using for decades.