The yen's "domino effect": Japan sets off a global financial quake that threatens to drag down Wall Street

The Japanese yen has staged a historic comeback that is shaking the foundations of the currency market.

The yen surged to 154.06 yen to the dollar, its strongest level since February, decisively surpassing the levels reached after the unprecedented joint currency intervention by Japan's Ministry of Finance and the U.S. Department of the Treasury.

This sharp reversal represents a colossal recovery for a currency that had sunk to four-decade lows, triggering the abrupt unwinding of positions worth billions of dollars in major financial centers around the world.

The Bank of Japan (BoJ), led by Kazuo Ueda, aims with this move to crush the suffocating imported inflation that is eroding the purchasing power of Japanese households, and also seeks to stop capital flight. By making money more expensive through interest rate hikes, Tokyo aims to restore the dignity of its currency, shield its importers, and send a lethal message to speculative funds that had comfortably bet on the yen's collapse. It is a survival maneuver for the nation, aimed at stabilizing the world's fourth-largest economy.

But the real tsunami is building outside Japan's borders. The sudden strengthening of the yen is blowing up, worldwide, the multibillion-dollar carry trade (a strategy in which giant investment funds borrowed yen at real interest rates of 0% to buy high-yielding assets, such as technology stocks in the U.S. or emerging-market debt)

Now that the yen is more expensive, repaying those loans costs a fortune. This forces investors on Wall Street and in Europe to liquidate stocks and other assets in a panic to cover their debts, which threatens to unleash a cascade of massive sell-offs, sink Latin American currencies, and push global volatility to levels markets have not seen in years.