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More insight into why yesterday’s 12.4% Japanese stock market decline affects the American stock market today.

Until recently, Japan was the last bastion of negative interest rates. Even this year, the Bank of Japan set interest rates at -0.10%. Then last week, the Bank of Japan increased the rates to 0.25%.

They were forced to do this because, just two months ago, the exchange rate was ¥163 to USD$1.00. Because of stagnant wage growth during the past 25 years, this was especially brutal for Japanese people.

At the same time, due to low interest rates, traders were borrowing from yen, converting them to USD to buy US stocks.

Well, increased Japanese interest rates means the yen has strengthened in comparison to USD.

Now everyone who has borrowed yen must not only contend with higher interest rates, they must contend with huge foreign exchange losses as well.

This is causing everyone who has borrowed yen to trade US stocks to exit their investments because they’re now facing margin calls.

In turn, this puts selling pressure on U.S. stocks which also exacerbates “extreme fear” stock market sentiment.