I'm almost getting it but I feel like I need a step by step explanation. From what I understand the JPY had a low or negative interest rate which made it effectively 'free' or at least cheap to borrow funds in it.
So am I correct that it was supposed to work like the following:
- Borrow JPY at a low interest rate
- Convert to USD
- Buy stocks
- Sell stocks (ideally with profit)
- Convert to JPY
- Pay back JPY loan (which had a low interest rate, leaving more profit)
For this to work the JPY interest rate had to remain low and the yen had to remain cheap, both of which are now no longer certain which is exacerbated by investors cutting their losses en masse making the yen more expensive (and maybe increasing the effective interest rate as well?).