After Hours International》Fed Rate Hike, Yen Carry Trade Unwinding, Taiwan Stocks Plunge 1,600 Points in a Single Day! Shih Jun-ji Warns: Could the Horror Scenario Repeat?

If the U.S. Federal Reserve (Fed) raises interest rates again in the future, Taiwan investors might first think of a stronger U.S. dollar and foreign capital outflows. However, former Vice Premier Shih Jun-ji warned on the 'After Hours International' program that the truly dangerous chain reaction could originate from the massive yen carry trade. If the Japanese government suddenly intervenes in the foreign exchange market, forcing investors to close their positions, global stocks and risk assets could be sold off, and the scenario of Taiwan's stock market plunging 1,600 points in a single day is not impossible to repeat.

Shih first explained the policy stance of Federal Reserve Chair Kevin Warsh. The newly appointed Fed Chair clearly stated during a congressional hearing that he would resolutely combat inflation and would not repeat the Fed's mistake in 2023—when the Fed misjudged inflation as a 'transitory phenomenon,' leading to delayed rate hikes and runaway inflation that still hasn't been fully contained. 'Warsh has clearly learned this lesson,' said Shih. 'He won't let a similar situation happen again.'

However, even though market expectations for rate hikes have dropped from 40% to 15%, Shih pointed out that three concurrent factors mean inflationary pressures have not truly subsided, making Warsh's decision-making more complex than it appears.

First is the explosive demand for AI infrastructure. U.S. capital expenditure on AI-related projects this year is estimated at $650 billion to $725 billion. This investment wave is directly driving up demand for electricity, construction materials, and infrastructure, creating significant demand-pull inflationary pressure.

Second is the impact of oil prices from the U.S.-Iran conflict. During the ceasefire from June 15 to July 8, crude oil prices briefly fell below $70 per barrel. But with the ceasefire ending and conflict resuming, prices have quickly rebounded to around $85, and energy price volatility is directly impacting overall inflation data.

Third is the lag effect of monetary policy. Although June's inflation data unexpectedly dropped to 3.5%, below the market's forecast of 3.8%, Shih warned that this figure reflects oil prices during the ceasefire period, and July's inflation data will be the true test.

Shih explained the chain risk scenario he fears most. If U.S. inflation re-escalates and Warsh is forced to raise rates, the U.S. dollar will appreciate broadly against major currencies, with the most profound impact on the yen.

Higher U.S. interest rates widen the interest rate differential between the dollar and yen, further stimulating the 'borrow yen, buy dollar assets' carry trade. However, if Japan's Ministry of Finance determines that yen depreciation has exceeded acceptable levels, it may suddenly intervene in the market—buying large amounts of yen during weekends or Japanese holidays—catching short-yen traders off guard and forcing them to urgently close their positions.

'The timing of Japan's Ministry of Finance intervention is always chosen so you can't react in time,' said Shih. 'When they did it last time, Taiwan's stock market fell 1,600 points that day.' The reason is that a portion of the funds involved in yen carry trades has flowed into the Taiwan stock market, particularly high-market-cap stocks like TSMC. Once carry trades are forced to unwind, these funds must rapidly exit Taiwan stocks, causing a sharp short-term sell-off.