The Hidden $20 Trillion Global Carry Trade that will Unwind Everything
The Hidden $20 Trillion Global Carry Trade that will Unwind Everything
Michael Cowan: 11-23-2025
For nearly three decades, a powerful, yet often invisible, financial mechanism has acted as the subterranean engine of global capital markets: The Japanese Yen Carry Trade.
This trade—a complex borrowing strategy stretching back to the 1990s—is the linchpin supporting trillions of dollars in global assets, including significant portions of the US Treasury market and the soaring valuations of the S&P 500.
But the cornerstone of this foundation has just cracked.
Recent, dramatic shifts have signaled that this multi-trillion-dollar carry trade is beginning to unwind, threatening not just a market correction, but a widespread financial upheaval potentially worse than the crisis of 2008.
To understand the danger, we must first understand the mechanism.
The Yen Carry Trade is financial arbitrage based on interest rate differentials. For decades, the Bank of Japan maintained near-zero or even negative interest rates to stimulate its economy. This created an irresistible opportunity for global investors.
This process flooded global markets, particularly the US, with cheap liquidity, driving up asset prices and effectively subsidizing US government debt. It was free money driving the greatest risk-on rally in history.
The fundamental assumption underpinning the entire carry trade was that Japanese interest rates would remain near zero indefinitely. That assumption is now dead.
For institutional investors who assumed these rates were anchored near zero, these spikes represent massive losses on their bond holdings, shattering confidence in the sustainability of Japan’s debt policy.
When investors lose faith in the anchor currency’s rate mechanism, the trade becomes untenable.
The process of the carry trade unwinding is a forced, destructive loop.
When Japanese yields rise, the cost of maintaining those yen-denominated loans increases dramatically. Investors who borrowed yen must now rush to repay their loans before the cost becomes crippling.
This is the catastrophic trigger. Trillions of dollars in US stocks, bonds, and emerging market assets—the foundation of retirement funds and 401ks globally—must be sold off rapidly.
Unlike the 2008 crisis, which was concentrated in the US housing market and derivative products, the yen carry trade unwind cuts across virtually every major asset class, threatening a cascade of forced liquidations worldwide.
The threat to market stability is severe, but it is magnified by concurrent challenges facing Japan:
Japan is finally seeing meaningful inflation after decades of stagnation. If the Bank of Japan is forced to raise its benchmark interest rate to control price growth, it will accelerate the unwinding process exponentially, punishing borrowers further and multiplying the asset liquidation pressure.
Geopolitical friction, particularly the simmering tensions between China and Japan over Taiwan, adds a layer of economic risk. Any escalation could provoke sanctions against Japan, further destabilizing its economy and forcing investors out of Japanese assets entirely.
We are already seeing real-world examples of this shift. SoftBank’s massive recent sell-off of Nvidia shares—a titan of the high-growth tech sector—serves as a stark warning. As confidence in assets fueled by cheap yen borrowing evaporates, investors are taking profits and moving to cash before they are forced to liquidate at distressed prices.
The potential unwinding of the Yen Carry Trade is not a distant theoretical risk; it is an active threat already manifesting in bond markets. This shift signals a massive repricing of global risk and capital costs.
The era of consistently cheap credit supporting inflated global asset prices may be coming to a harsh and sudden end. Investors need to be acutely aware of the systemic risks associated with this monumental financial mechanism finally grinding to a halt.
For an unprecedented, in-depth look at how this financial earthquake could impact your investments and the stability of the global economy, we highly recommend you watch the full analysis from Michael Cowan.