Japan Lit the FUSE — The Yen Carry Trade Unwind Will Crash the US Economy

Japan Lit the FUSE — The Yen Carry Trade Unwind Will Crash the US Economy

Hello everyone, welcome back to the channel. Before we dive into this video, I would like to make a very quick announcement. As we are approaching a new year, you will see a number of changes here on World Affairs and Context. I’m very excited about the upcoming changes. A significant part of my content is going to migrate over to Substack and Patreon. You’re going to see new interviews there. Yes, I will resume doing interviews. You will see more written content. By the way, I just uploaded a new article on Substack on Patreon this morning. You’re welcome to head over there and read it. And there will be more ways for you to engage with the content, chat with me and other subscribers in the subscriber only chat. It will be a really great way to connect with like-minded people and to share your thoughts, to share your opinion. I will include the links to the Substack and Patreon in the description box below this video. Make sure that you are subscribed. I look forward to seeing you on those two platforms. For decades, Japan was the quiet enabler of global risktaking. While the rest of the world cycle through booms, busts, and tightening phases, Japan effectively stayed frozen in time. And of course, I’m referring to near zero interest rates, cheap funding, and an open invitation to borrow yen and then turn around and invest literally anywhere in the world, which enabled the carry yen trade. That era may have just ended since Japan is the biggest holder of US treasuries of US debt. In other words, the question now is will Japan collapse American economy? Let’s dissect what just happened and what to be aware of. This week, the Bank of Japan raised its benchmark interest rate by 25 basis points to 0.75%. This is the highest level in three decades. On paper, that number still looks small. Nothing to write home about. But markets don’t trade on levels alone. They trade on what? They trade on direction. And the direction just changed. Governor Kazu Oeda tried to soften the blow. He said that real interest rates will remain significantly low. But no one listening carefully missed the point. The free money era is over and global markets are now staring down the possibility of a massive yen carry trade unwind. To understand why the world is holding its breath, you have to understand what the yen carry trade actually is. In very simple terms, it’s borrowing money in a country with ultra low interest rates such as Japan and investing that money in higher yielding assets elsewhere. For nearly 30 years, Japan offered almost zero cost funding. Traders borrowed yen, sold it for dollars, for pesos, real, crypto, equities, bonds, effectively anything with yield and pocketed the difference. As long as the yen stayed weak or stable, it was basically free money. But there was always one risk. If the yen strengthened, those profits could vanish overnight. Well, that risk just became reality. Markets actually expected the rate hike. Remember, I discussed this in my previous video on the subject, and the video has more than 500,000 views by now. Thank you so much to every single one of you who watched it. But I discussed that about 70% of traders had priced in a rate hike. But remember expectations and reality are two very different beasts. When the decision hit the US dollar to Japanese yen uh initially spiked toward 157 and then it violently reversed to around 153 within hours. The rate hike hits differently this time than the last one. Back in August, when the Bank of Japan surprised markets, the Nikay crashed about 12% in a single day. Well, this time the move was telegraphed. It was widely expected, but remember telegraph doesn’t necessarily mean harmless. The Bank of Japan made it very clear that more hikes are coming. The economy is recovering moderately. They say the labor market is tight. Wages are rising, but inflation is no longer dormant. Inflation is rising in Japan, which means that the hike is not a one-off adjustment. This is the beginning of a tightening cycle. That matters because there is still an enormous amount of yenfunded leverage around the global system. Estimates vary widely, but even conservative calculations put hundreds of billions of dollars in outstanding yen carry positions. For example, Morgan Stanley estimates around $500 billion dollars are still active. Others argue that the true number once derivatives and indirect exposure are included could reach into the trillions. At 0.25%, the carry trade was a no-brainer. It was cheap money at 0.75% it may become slightly uncomfortable but at 1 and a4% or even higher which markets are now openly discussing for 2026 that math starts to break. So yes when the yen carry unwinds the United States economy will react and it will react poorly very poorly. It will likely cause a full-blown crisis. And the key danger isn’t just higher borrowing costs, by the way. It’s a shrinking interest rate differentials. Japan is tightening while other central banks are pausing or cutting interest rates. And so that gap um that initially made the trade so attractive is closing fast. You can already see the stress points forming actually a stronger yen. actually hurts exporters. Companies like Toyota, Sony, and other global giants that rely on overseas revenues. Early optimism often fades once currency reality sinks in. And this is exactly what’s happening right now. Emerging markets are already flashing warning signs. Just this week, the Mexican peso weakened, the Brazilian realale slipped, and the Turkish lera declined. These currencies were popular carry trade targets. They were funded with cheap yen. As funding costs rise, the bid disappears. The bond market is sending its own message. Japan’s 10-year government bond yield is already near an 18-year high around 1.95%. And here’s the paradox. Higher yields make Japanese assets more attractive to Japanese investors. That means they want to bring their money back home because they anticipate higher profits that uh domestic assets can generate. That’s where contagion risk really lives. Japan has one of the largest pools of overseas investments in the entire world. Roughly $4.9 trillion in foreign securities. If domestic yields become competitive, even a small repatriation flow can actually ripple across global markets. And yes, the United States economy will be affected. The higher Japanese yields go, the more incentive there is to bring money back home. And once that starts, it doesn’t stay contained. This is why strategists are actually taking the Bank of Japan more seriously than the Federal Reserve right now. They’re warning that a hawkish move from Japan could pose a bigger threat to US equities than US policy itself. That sounds dramatic, sure, but the logic is very straightforward. The fat tightening is known. It is modeled and uh it is largely absorbed. Japan’s tightening is a regime shift. So, should we expect a crash? Not necessarily. I would say the carry trade likely won’t explode overnight. It’s not going to be a quick event. It will unwind as funding costs rise gradually. Um, exchange rate shifts and leverage becomes uncomfortable. The assets that benefited most from cheap yen, such as crypto, emerging market bonds, they are the most vulnerable ones. This time, the Bank of Japan is clearly not bluffing. And one thing is obvious, the risks to the US economy as well as the global economy are clearly rising. Make sure that you’re staying tuned. I will keep you updated here on YouTube as well as on my Substack and Patreon. Thank you so much for watching. I appreciate you joining me. Support my work. I do appreciate every single one of you who has become a paid subscriber. Thank you so much. Enjoy the rest of your day and I will see you back here tomorrow. Take care.

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For decades, Japan quietly fueled global risk-taking. Ultra-low interest rates turned the yen into the world’s cheapest funding currency, powering the massive yen carry trade that propped up stocks, bonds, emerging markets, and even crypto. That era may have just ended.

This week, the Bank of Japan raised interest rates to 0.75% — the highest level in 30 years. The number looks small, but markets don’t trade on levels. They trade on direction. And the direction has just flipped.

In this video, we break down:
– Why the yen carry trade matters more than most investors realize
– How a stronger yen can trigger a global deleveraging event
– Why U.S. equities, Treasuries, and emerging markets are vulnerable
– How Japan’s massive holdings of U.S. debt could amplify contagion
– Why strategists now see Japan as a bigger systemic risk than the Fed

With hundreds of billions — possibly trillions — still tied to yen-funded leverage, even a gradual unwind could send shockwaves through global markets. Emerging market currencies are already wobbling. Bond yields are rising. Capital may be heading home to Japan.

This isn’t about panic. It’s about understanding a regime shift that Wall Street is only beginning to price in

Watch to understand what just changed — and what comes next.

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