Il Giappone sta per rompere il sistema

Il Giappone sta per rompere il sistema

There is the potential for an economic crisis that’s happening in Japan right now. And honestly, it’s kind of flying under the radar, but what’s happening in Japan could very directly impact your stocks, any bonds that you may own, and definitely the crypto market. And really what’s happening here is absolutely exposing how interconnected and fragile the global financial system actually is. In fact, when Japan first started to address this potential economic crisis in early 2024, it sent shock waves through markets, causing a 14% decline in the dollar versus the Japanese yen and even contributing to a 6% slide in the S&P 500. By the way, I get why people aren’t really paying attention. I mean, the Bank of Japan, the Japanese yen, uh, it’s not something that’s a part of the everyday conversation. But what I think a lot of people fail to recognize is that Japan is actually the fourth largest economy in the world, right behind Germany and right before India. And that’s not even everything. I mean, Japan is also one of the largest treasury markets in the world, right after the US and China. And so, this treasury market in particular is actually what’s responsible for what could be a 20 trillion plus meltdown in the global financial system through what’s called the Japanese yen reverse carry trade, which you may have heard of. So, what exactly is going on in Japan? What is this Japanese yen reverse carry trade that you keep on hearing about and what does this mean for your money and global markets? Well, before we even talk about what’s happening in Japan, you need to understand why this matters outside of Japan. So, Japan is responsible for funding a massive amount of global leverage. And what do I mean by that? Well, I mean that investors all over the world have gone to Japan to borrow money in the form of Japanese yen and to go out and buy assets like US treasuries. Now, why are we borrowing yen to go out and buy US treasuries? Sounds kind of random. Well, the reason is because interest rates in Japan have been near zero since the late ‘9s and even went negative in 2016. So, if I can borrow yen at 0%. And then buy an asset that even pays me just 1%. Then I’m technically earning free money. And more on this a little bit later. But to understand why Japan has had zero and even negative interest rates for decades, we need to go back to the 1980s. At that time, Japan had just become the world’s second largest economy, and investors were having a blast. Real estate in Tokyo was skyrocketing. It was literally some of the most expensive land in history, and stocks were trading at exuberant multiples of their yearly earnings. Just for some perspective on how crazy the real estate market in Japan got, it got up to around 20 trillion dollars, which is five times the amount of all of the real estate in the United States at that time. And you had Tokyo’s Imperial Palace sitting at a value that was worth more than the entire state of California. Okay, so things were running wild. But as you know, all bubbles eventually pop. And in the early 1990s, that’s exactly what happened. But what caused this pop? Well, going into the ’90s, you had years of low interest rates. And because of that, you had high investment. And really, you got to the points where you had allout speculation. Now, when money is cheap, meaning when rates are low, people get creative and find ways to use that money. And when an economy runs hot like that, assets can go higher, but so can the general consumer prices or what you will refer to as inflation. And when that happens, people who don’t own assets, okay, those assets that are going up in price because of all of the increased investment, those people who don’t own those assets get squeezed, okay, and they start to feel pain because their wages don’t necessarily have to go up even though the prices of assets are going up. And if their wages aren’t going up, but prices are going up, then well, that equals pain. So in the 1990s, the Bank of Japan finally said, “Hey, we probably should stop this party. So they raised interest rates to try to cool the economy down. So rates went up, borrowing became more expensive, confidence collapsed, and the system turned. When I say that confidence collapsed, let me break that down a little bit because what I mean is that people stopped believing that asset prices would keep going up. And when beliefs change, so do behaviors. So investors stopped buying stocks and real estate because they didn’t expect prices to continue to rise when rates are going higher. Banks stopped lending aggressively because the collateral that was backing loans, right, stocks and property started to go down in value as well. And so also you had businesses, they stopped expanding because future demand looked uncertain and ultimately households started to pull back on spending. because their net worth is falling and once again their wages might not be going up throughout all of this either. So stock prices collapsed, real estate values plummeted, and the economy slid into decades of stagnation and deflation. Now deflation creates yet another problem and as you’ll see here essentially restarts the whole cycle. Deflation is when the general price levels of goods and services falls over time. And this is typically caused by weaker demand. So when consumers and businesses stop spending, then prices are going to fall because sellers are competing for fewer buyers. If there’s fewer people buying, I need to lower my prices so that I can sell goods. And this usually happens when you have a recession or even just a postbubble economy. So when you get deflation, people expect prices to keep falling and so they delay their purchases. If something’s going to be worth less tomorrow, then why would I buy it today? Businesses are also going to have weaker sales because people aren’t buying things. So what are they going to do? They’re going to cut their prices to get people to buy. When you have lower prices, that means you’re going to have lower revenues. And when you have lower revenues, you’re going to have to decrease your wages as well. And when you lower wages, you’re going to get even weaker demand because there’s going to be less money that’s in the hands of everyday people that are working right now. That right there can turn into a spiral that is absolutely devastating to an economy. So when this happened in Japan in the ’90s, the Bank of Japan had to take massive action and they did something that no other economy had ever done at this scale in modern history. So it pushed rates down to zero and eventually below zero to try to restart the economy. Now lowering interest rates makes borrowing cheaper for consumers and businesses. The idea is simple. When loans are cheap, people are more likely to buy homes, cars, and even invest in businesses. Companies can then expand, hire more workers, and pay higher wages if they have the ability to borrow money and invest. So that increased spending will put money back into the economy, raise demand, and in theory stop prices from falling. So when a central bank says, “Hey, we’re going to lower rates,” they’re trying to restart investment and activity in the economy. Now that decision that Japan made to lower rates to near zero and even negative did not just change the circumstances in Japan, no, no, no new. This changed the whole world from this point forward because when rates stay near zero for decades, by the way, your currency stops being a store of value and starts becoming a funding tool. The Japanese yen became the cheapest source of money on Earth. And over time, trillions of dollars flowed out of Japan and into the US into US stocks, bonds, real estate, and even over in other countries into emerging markets. And eventually, really, some of that money probably flowed into crypto. Because when money is cheap, meaning that borrowing costs are low, people will borrow in your currency to go out and buy assets that can produce a higher return in another currency or anywhere else in the world. So when Japan took its interest rates down to zero like that, it wasn’t just influencing its own economy, it started to become an economic driver for all economies all around the world. And so this is how Japan became the silent absolute driver of global liquidity. The thing is is you barely notice this when everything’s cool. But if things start to get shaky, you’re going to feel the tremors, right? That’s exactly what’s making the stakes so high today. If Japan loses control, markets aren’t going to slowly adjust. If Japan loses control of its bond market or of the value of its currency, then things can get out of control and markets will get really volatile really fast. Things can get very volatile in the scenario because this isn’t about investors changing their minds. No, no, no. This is about traders being forcibly forced out of their leveraged positions. And this is what I’m talking about when I’m talking about the Japanese yen reverse carry trade. So, let me break it all down. Here’s the idea. Imagine you can borrow money at 0% interest, like we said earlier, which is exactly what Japan has made possible with the yen for the past few decades. You take that money and you invest it somewhere else that pays a little more. Let’s say it’s 1% in US treasuries. And now that difference, the spread between what you earn and what you pay is basically free money. Remember the other day we talked about good debt. We call this good debt because it pays me to take on that debt. I take that debt, I go and buy something. Okay, I haven’t I have no skin in the game, but that thing that I bought is going to pay me money. So, naturally, investors want as much of that free money as they can get. So, what do they do? They borrow in huge sums in yen that they can then take and invest abroad. That’s called leverage. Using borrowed money to try to amplify returns. But the thing is that leverage works in both ways. If the cost of borrowing rises, then suddenly that trade can turn from good debt into bad debt. If the interest rate you’re paying for that borrowed money climbs above what you’re able to earn on the investments that you made with that money, then you’re going to have to sell those assets quickly to be able to cover the loan or to pay the loan back. And when enough people do that at the same time, that’s when things get really volatile or even completely freeze up. And that is what I mean when I say that leverage can be forcibly unwound. And this is exactly what happened in early 2024 when the Bank of Japan took interest rates from negative to zero and eventually continue to hike them into the positive territory. Now, let’s zoom back in on this Japanese yen carry trade. And at this point, I actually want to shout out uh Shanaka Anam Pereira for his work on this because it helps to frame why this matters so much right now. So for decades, Japan kept short-term interest rates near zero that made the yen the cheapest funding currency in the world. Investors borrowed trillions of yen and used it to buy higher return assets across global markets. Over time, that trade grew massive, more than $20 trillion USD in exposure. And that’s before you can even count the leverage that’s been stacked on top of that. Now, today, that trade is being pressured from two directions. And this is where things can get very dangerous because first, you have the Bank of Japan ending its negative interest rate policy in early 2024 and continuing to raise short-term interest rates since then. And these short-term interest rates matter because they determine the actual cost of borrowing yen. When that cost rises, the carry trade stops being free money and the math starts to break and you need to get back your yen. You need to sell your assets that you have, buy the yen back and use that to pay off the loans. Now, at the same time, you have long-term Japanese bond yields surging with the 40-year bond hitting the highest level in almost two decades just a few months ago. And now long-term yields don’t set borrowing costs for the carry trade, but they do something that’s just as important. They can increase volatility in the overall system and signal that markets are questioning the Bank of Japan’s ability to man the ship. So when borrowing costs rise and volatility rises at the same time, leverage doesn’t unwind slowly. Positions get forcibly closed. And that’s why Japan’s cheap money hasn’t just financed its own economy, it has financed trillions of dollars of global risk-taking. And if that funding source starts to reverse, the impact doesn’t stay in Japan, it’s going to ripple through the US treasuries market, equities, corporate credit, and crypto all at one time. So, when Japan’s 40-year bond yield hits the highest level in nearly two decades, the government thought to itself over there, they were like, uh, well, we probably can’t just like let that happen. And so, they responded with a $135 billion stimulus package, which is the largest since 2020 when we had the public health crisis. And with the Bank of Japan continuing to hike rates right now, potentially even this Friday, the risk is that one of the most important and most dangerous trades in global finance will unwind in a disorderly way. The short-term rates are breaking the math of the Japanese yen carry trade. The long-term yields are breaking the confidence in the entire system and together that could cause absolute chaos. The final thing that I want to touch on today is what’s called interest rate differentials. Okay, this is going to tie into the currency markets because this all becomes one big problem. Interest rate differentials are what it sounds like where it’s the difference between the interest rate in one economy versus the interest rate in another. When one country’s interest rate goes higher than the other, the higher rate becomes more attractive. So you can see money flow from the lower interest rate currency to the higher interest rate currency. And right now you have this happening at an accelerated pace where one central bank, the Bank of Japan, is hiking while the US Federal Reserve is actually dropping rates. Now when you have two different economies heading in opposite directions like that, it’s it’s a recipe for an issue. I’ll just say that because the thing is is that when Japanese yen rates rise, traders who borrowed in yen to buy treasuries now need to sell those treasuries for yen. But that also is going to push the price of the Japanese yen up as those traders need more of it, right? And hopefully it’s clear now why that could be catastrophic for global markets. If everybody needs yen at the same time, the price of the yen is going to skyrocket and then they’re not going to be able to buy it at a rate that’s actually going to be sustainable or going to allow them to be able to pay back their loans. So, with all of that said, the thing that I’m going to be keeping my eye on is twofold. First, we have to keep our eyes on the shortterm interest rates in the United States Treasuries market. Second, we have to keep an eye on the dollar yen foreign exchange pair because this also could give us some signals of what is going on regarding this carry trade. If things get out of hand here, it could be really bad for risk assets. Now, maybe there’s a chance that what’s happening here actually has to do with what we just talked about, I think yesterday, which was about the Fed’s brand new reserve management purchase program. Could it be that the Fed is trying to provide liquidity to short-term US treasuries in preparation for the continued rate hikes from Japan, which could trigger massive selling of short-term US treasuries as the Japanese yen carry traders try to get rid of those US treasuries to get the yen that they need to repay their loans? Is the reserve management purchase program in the US trying to keep short-term rates under control in this sort of a scenario? Maybe I’m crazy and I’m not seeing uh how this actually works properly. So, definitely let me know if that’s the case in the comments. But this is Keith D. I’m here to talk everything money and markets. And if you found any value in any of this, be sure to like and subscribe. And like I said, if I’m missing anything here or if you think that I’m completely mad, let me know in the comments down below and we can continue the discussion there. If I have any major corrections I need to make, I will put that in the pinned comment. And if you haven’t already, be sure to subscribe to my live show with Ben Levit called Memes and Markets. We go live every Tuesday and Thursday at 12:00 p.m. Eastern. And what we do is we break down topics like this in depth and we talk about where culture and financial markets intersect. You can click the first link in the description to subscribe to Memes and Markets. And with all that said, I’ll see you next time. Pass.

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Most people aren’t paying attention to Japan right now — and that could be a massive mistake.

Japan isn’t just another foreign economy. It’s the fourth largest economy in the world and one of the largest holders and funders of global debt. For decades, near-zero and negative interest rates turned the Japanese yen into the cheapest funding currency on earth, quietly financing trillions of dollars in global leverage across U.S. Treasuries, equities, real estate, and even crypto.

But that system is starting to crack.

In early 2024, the Bank of Japan ended negative interest rates and began raising rates, putting enormous pressure on the Japanese yen carry trade — a trade estimated to exceed $20 trillion in exposure. When borrowing costs rise and volatility increases, leveraged positions don’t unwind slowly. They’re forced to unwind.

In this video, I break down:
• Why Japan’s interest rate policy matters to global markets
• How the Japanese yen carry trade works — and why it’s so dangerous
• What rising Japanese bond yields are signaling right now
• How this could impact U.S. Treasuries, stocks, and crypto
• Why currency markets and interest rate differentials are becoming a major risk
• Whether the Fed’s recent reserve management purchases could be preparing for a liquidity shock

This isn’t just a Japan problem. If the yen carry trade reverses in a disorderly way, the impact could ripple through every major asset class.