The Japanese Carry Trade Is Unwinding — And It Could Hit U S Markets Hard | David Stryzewski

The Japanese Carry Trade Is Unwinding — And It Could Hit U S Markets Hard | David Stryzewski

Hey friends, David Straskesi here. Today we’re diving into something most news outlets won’t touch base on because well, it’s complicated. It’s hidden and frankly it’s not well understood. Uh but it has the potential to shake the global economy. I’m talking about the Japanese carry trade and right now it’s waking up like Godzilla coming out of the ocean. So what is the Japanese carry trade? Well, let’s just break this down in plain English. For 35 years, Japan’s interest rates have been basically at zero. So global investors can say, “Hey, I can borrow yen for almost nothing, convert it into dollars, and then they buy higher yield assets like US stocks, real estate, bonds, maybe even crypto, and then they can pocket the difference. So this is the yen carry trade, borrowing cheap yen to finance investments everywhere else. And because the borrowing cost was almost nothing, investors could leverage up, meaning they could use more borrowed money than ever before. This is one of the major reasons why we’ve seen record high stock markets worldwide, explosive real estate valuations, huge private equity and hedge fund deals, rising commodity prices, as well as part of the crypto boom. Cheap Japanese money has been the oil in the engine for decades. But at this point, the engine’s overheating because the oil is running thin. Let me give you a few real world examples. Developers around the world have financed mega projects, apartment towers, commercial buildings, corporate campuses using ultra cheap yen loans that made deals look profitable if borrowing costs stayed low. Look at the stock market. Hedge funds have borrowed yen to buy US tech stocks. Big leverage means big returns as long as the yen stays weak. Let’s talk about private equity. PE firms use the yenf funed leverage to buy entire companies. This is financial engineering for the profits in order to flip them. And then let’s talk about derivatives. So risk parity funds, volatility strategies, structured notes. Many are quietly linked to the yenfunded positions. And of course, that’s kind of the confusing part. This is why the carry trade is so dangerous. It’s not in one place. It’s literally everywhere and much of it is buried in opaque derivatives that don’t show up on normal financial statements. We don’t know the exact size of these issues, but estimates range anywhere from 2 trillion to over 20 trillion depending on what you include in the analysis. When that unwinds, it’s not a wave. It creates a tsunami. Right now, Japanese yields, especially the 30-year bonds, the longer duration ones, have spiked to the highest levels ever recorded. And here’s what most people don’t understand. Rising yields equal falling bond values. Think of a seessaw like my kids like to play on. When yields go up, the value of the bonds that you held before go down. And so, Japan has the highest debt load of any major nation, around 230% to 260% of their GDP. When yields rise, the value of their existing bonds fall. And because the government owns enormous amounts of those bonds, the balance sheet starts to shake violently. Most people would think that bonds are safe. And traditionally, that’s been true. But when interest rates rise fast, bonds lose value. Sometimes a lot of value. We’ve already seen this movie in the US with regional bank failures. Japan is now experiencing an earthquake under the surface, and the deep pressure has continued to build. Now, most people don’t know this, but the Bank of Japan owns around 7 to 8% of its entire stock market through ETF purchases. That’s significant. That means that the Japanese government is basically a giant shareholder in its own economy. But when bond yields rise and debt becomes more expensive, they’re being forced to sell equity to plug the holes. They must raise cash. This means selling stocks, in fact, billions worth of stocks. Selling stock pushes markets down. Falling markets push investor confidence down. Falling confidence pushes the yen up. And when the yen rises, well, the carry trade starts to blow apart. At this point, Japan’s central bank is trapped in a brutal scenario. They could raise interest rates. That strengthens the yen. A stronger yen kills the carry trade, however, and a carry trade unwind causes global selling. But rising rates also make their government debt unaffordable. They push bond yields even higher. This crashes the bond prices, damages banks and balance sheets, and enforces even more asset sales. Option two, they could ease or they could stimulate. This weakens the yen. It keeps the carry trade alive, but it also pushes inflation higher, requires more money printing. This damages, of course, purchasing power, which we’ve talked about, the silent inflation. This weakens the yen, but it keeps the carry trade alive. But it also pushes inflation higher, requires more money printing, damages purchasing power, threatens their credibility as a nation, and risks a currency crisis. Japan appears to be choosing the more stimulus route, which means printing, intervening, and trying to hold the system together with duct tape. But that strategy only works until the market loses confidence. Right now, what we’re seeing is the equivalent of an underwater earthquake phase. Yields are rising, bond values are falling, the yen’s starting to wobble, and Japan started to sell stocks and derivatives are getting stressed. We saw a small preview of this in August of 2024 when volatility exploded out of nowhere. This was the equivalent of a tremor. But if the yen strengthens beyond key levels, like around 150, then the quake turns into Godzilla emerging from the ocean. When Godzilla shows up, he doesn’t just kick over a couple of sand castles or lawn chairs. He stomps across the US stock market, Japanese stocks, European stocks, real estate deals, private equity portfolios, crypto, commodities, bonds, currencies, because everything has been built on this hidden structure of cheap yen and global leverage. This is not a moment for complacency. Just because markets look calm today doesn’t mean that there isn’t pressure building. These waves start in Tokyo, but they hit American shores very quickly. And as we know, we are often surprised not by risks that we see, but by the risks hidden under the water that we don’t see. Now, let me be clear. America has an incredible tailwind right behind it right now. AI today is booming. Infrastructure is being built. Energy independence is within reach. Manufacturing is coming home. And innovation is exploding. I’m incredibly optimistic about America’s long-term future, but the path between here and there could be very bumpy if global liquidity gets disrupted and Godzilla walks up on the beach. This is why strategy matters now more than ever. This is exactly why we focus on riding bulls and taming bears, capturing 70 to 80% of the market’s upside while avoiding 70 to 80% of the big downside hits. Not buy and hold, park and pray, hope everything will be okay. not hope the Fed saves me this time. Hope is not a real plan. You need a disciplined strategy. You need a team. You need an adviser who understands how these global currents work and how they affect your retirement, especially if you’re in the red zone. America’s future is bright, but Godzilla is stirring. Let’s make sure your financial house is set on the rock and it can withstand the waves that can show up. Let’s position you to prosper on the other

I break down one of the biggest hidden risks in the global financial system right now: the Japanese carry trade. Most people have no idea how much of the world’s markets have been built on decades of ultra-cheap Japanese money — stocks, real estate, private equity, even parts of the crypto boom.

But that structure is now shaking.

Japanese bond yields are rising, the yen is starting to strengthen, and liquidity is getting stressed beneath the surface. When those forces collide, it doesn’t create a ripple — it creates a global wave. These shocks start in Tokyo, but they hit American markets fast.

I’m incredibly optimistic about the long-term future of the United States. Innovation, AI, manufacturing, and energy are all major tailwinds. But the path between here and there could be volatile if global leverage begins to unwind.

This is why having a disciplined financial strategy matters now more than ever. If you’re in the retirement red zone and you don’t have a plan that adapts to both bull and bear markets, this is your moment to get serious.

If you need a team that understands how these global trends impact your retirement, visit https://myspg.com

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