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
Lena Petrova: 12-21-2025
In a significant move that is sending shockwaves across the globe, the Bank of Japan has raised its benchmark interest rate for the first time in three decades.
The 25 basis point increase to 0.75% may seem like a modest adjustment, but it marks a pivotal shift in the global financial landscape.
As we explore in this blog post, this change signals the end of Japan’s ultra-low interest rate era and the beginning of a tightening cycle that is likely to have far-reaching consequences.
For nearly 30 years, Japan’s near-zero interest rates enabled the yen carry trade, a strategy where investors borrowed cheap yen to invest in higher-yielding assets worldwide. This fueled risk-taking and liquidity in global markets, as investors sought to capitalize on the interest rate differential.
However, with the Bank of Japan’s decision to raise interest rates, the yen carry trade is now under threat. A strengthening yen and rising Japanese rates are making it more expensive to borrow yen, forcing investors to reassess their strategies.
The implications of this shift are complex and multifaceted. As Japan is the largest foreign holder of U.S. Treasury debt and holds trillions in overseas investments, the carry trade unwind could have significant repercussions for global markets, particularly in the United States.
Rising Japanese yields may prompt the repatriation of funds, creating ripple effects across global asset markets. This could lead to a decrease in liquidity, potentially destabilizing markets and impacting asset prices.
A stronger yen is also likely to pose challenges for Japanese exporters like Toyota and Sony, as their products become more expensive in international markets.
Moreover, emerging market currencies that benefited from yen-funded carry trades are already showing signs of stress. As the carry trade unwinds, these currencies may face further pressure, potentially leading to instability in emerging markets.
While this is not an immediate crisis, the Bank of Japan’s tightening marks a regime shift that could pose a greater threat to U.S. equities and global financial stability than Federal Reserve policy.
The scale and interconnectedness of Japan’s financial footprint make this a development that investors and observers cannot afford to ignore. As the carry trade unwinds and markets adjust to a new era of higher Japanese interest rates, it is essential to monitor the evolving situation closely.
In conclusion, the Bank of Japan’s decision to raise interest rates is a significant turning point in the global financial landscape.
As the yen carry trade unwinds and markets adjust to a new reality, investors and observers must remain vigilant. To stay ahead of the curve, it is crucial to continue monitoring the situation and adjusting strategies accordingly.