• According to SocGen, the unrest surrounding the settlement of the yen carry trade could continue.
• Analysts pointed to the Japanese central bank, which appears poised to continue raising interest rates.
• According to SocGen, further unwinding of the yen carry trade could dampen enthusiasm for US technology stocks.

The chaotic yen carry trade unwinding on the stock market, which led to the worst sell-off in two years in August, may not be over yet, according to Societe Generale.

The European bank indicated that the Japanese central bank is likely to continue raising interest rates, a development that shook markets in early August.

Investors panicked after the Bank of Japan made a surprise interest rate hike in late July. The move led to an unwinding of the yen carry trade, a popular strategy in which investors borrowed money at ultra-low interest rates in Japan to invest in other assets, such as U.S. stocks.

The effects of that selloff have faded, with major U.S. indexes more than recovering their losses over the past month. But more unrest could loom as rates in Japan appear to be on the verge of “normalizing” after decades of deflation, said Albert Edwards, global strategist at SocGen.

The Japanese economy is also showing promising signs that another rate hike is needed. Wage growth in Japan outpaced U.S. wage growth for the first time in more than two decades, Edwards noted.

“We have always urged our readers to keep a close eye on Japan, as the country has consistently been a frontrunner in major market moves,” Edwards said in a note to clients on Tuesday. “Any normalization of Japanese interest rates would have a major impact on the market — not just in the short term (by unwinding the yen carry trade), but also in the longer term, as higher Japanese interest rates would limit the export of investment flows,” he added later.

Some investors have already seized that opportunity, with a significant number of investors closing their short positions on the yen in recent months. According to SocGen data, net open interest rose in August, indicating that most investors are no longer shorting the Japanese currency.

Meanwhile, the U.S. economic outlook looks rocky, Edwards said, which could hurt U.S. stocks. He pointed to weakness in the U.S. labor market over the past year and waning earnings optimism in the technology sector, which has driven the bulk of S&P 500 returns in recent years.

“Could the yen carry trade still hold? We need to keep a close eye on the other side of the yen carry trade, where a decline in tech prices could also undo the trade. We are keeping a close eye on the declining optimism on US tech EPS,” Edwards added.

Edwards has been predicting a recession and stock market crash in the U.S. for months, even though many economists say the economy remains on solid ground overall. GDP beat expectations for the second quarter, while inflation continued to cool. Employment, meanwhile, remains positive, with the unemployment rate rising but still near multi-decade lows in July.