Saturday Hashtag: #GlobalFinancialTremors

Listen To This Story

Global finance can seem abstract, but its instability has a tangible impact on your life, from higher borrowing costs and job losses to shrinking savings and rising prices. Understanding these abstractions is actually important for your day-to-day decisions.

Yen Carry Trade 

For decades, Japan’s low-interest yen has fueled the yen carry trade, where investors borrow yen cheaply and convert it into higher-yielding currencies like the US dollar. 

While this type of currency trade has long driven global investment, the rising yields in Japan are threatening profits that could disrupt US markets, including stocks, bonds, and credit, which affect you directly.

A Structural Shift

Japan is undergoing a major economic shift, highlighted by the snap election on January 19. With inflation high and long-term bond yields at a 40-year peak, economic pressures are intensifying. 

The Japanese government has decided to increase domestic spending to stimulate growth and support an aging population, while the central bank has begun raising interest rates for the first time in decades.

The size of the $261 billion yen carry trade seems inconsequential compared to the $69 trillion US stock market or $33 trillion US debt, but it reflects a global trend of nations shifting economic policy from global financial strategies to domestic stability. 

This policy trend weakens demand for US bonds, pushing borrowing costs higher and making mortgages, car loans, and business financing more expensive. It may also contribute to global market instability as central banks respond to rising geopolitical tensions.

Market Dynamics

To understand how this affects markets, it’s essential to consider the fundamental functions of market operations.

Leverage: Borrowing money to amplify profits also magnifies losses, forcing rapid sales when markets fall, accelerating downturns that hit retirement accounts.

Concentration: When a few investors hold large positions, their actions can distort markets and increase volatility if they sell, raising the risk of sudden crashes.

Crowded positioning: When many investors make the same bet, losses can cascade rapidly if the market moves against them, triggering forced selling across asset classes

For example, on January 6, just before key economic reports were released, a $1.6 billion notional leveraged bet was placed, wagering that the Federal Reserve would not cut rates.

The trade involved 200,000 contracts, with a risk amount equivalent to approximately $8 million per basis point move for the entire position. 

This enormous, highly concentrated position, more than double the previous record, raises concerns about increasing deregulation and market manipulations through suspiciously timed trades, posing significant risks to stability.

Global Pressures

Rising interest rates in the US and Europe, growing inflation, and geopolitical division are straining global stability, at a time when consumers have little financial buffer left.

US political and economic instability fueled by Trump’s trade wars and Greenland threats, has already prompted NATO allies to start dumping US assets that total $12.6 trillion, reducing foreign support for US debt markets.

As these pressures mount, the Federal Reserve faces increasing challenges in managing  systemic fragility and risk. It has already taken extraordinary measures, including cash infusions totaling $29.4 billion in October and $40 billion in December, indicating stress beneath the surface.

System on the Edge

Spending concentration has dramatically destabilized US demand, with the artificial intelligence bubble adding $5 trillion to the wealth of the top 10 percent, who own 93 percent of US stocks. Their spending now drives almost 50 percent of the economy, while the majority gains nothing.

Shifts in Japanese bond yield, capital flows, speculative Fed positions, and tightening global liquidity are deepening instability in a system increasingly untethered from functional regulation, raising the likelihood of a sharp financial correction rather than a slow adjustment.

On January 27, the International Monetary Fund reported it is preparing for a dollar run, signaling the potential end of the dollar’s 80-year reign as the global reserve currency. Losing this status would destabilize markets, sharply raise borrowing costs, weaken the dollar, and erode Americans’ purchasing power.

In response, the Fed might try rate cuts and liquidity support. But this would collapse that $1.6 billion fed bet, further deepening the impending financial tumult.

Taken together, these forces could trigger a catastrophic US downturn, marked by market crashes, job losses, depleted retirement savings, and restricted credit, potentially worse than 2008.

Hashtag Picks

Beware of the Unwinding Japanese Carry Trade

The author writes, “On Wall Street, it is said of the carry trade that first they carry you in and, then they carry you out. By this, it is meant that a lot of money can be made by borrowing in a depreciating currency that has low interest rates and lending in an appreciating currency that has high interest rates. The catch however, was that you could lose your shirt if the currency in which you borrowed began to yield higher interest rates and started to appreciate. This would be especially the case at a time when the interest rates of the currency in which you lent started to decline, and that currency started to depreciate.”

Explaining the Japanese Bond-Market Rebellion That Has the Whole World on Edge

From Business Insider: “Japanese bond yields surged … sparking volatility in global markets. Prime Minister Sanae Takaichi’s call for a snap election and proposed fiscal plans have fueled investor concerns. Rising Japanese yields may impact US and European rates as global investors react to volatility.”

Has Japan Truly Escaped Low Inflation?

From The Economist: “Japan is used to the position in which it currently finds itself: apart from the rest of the rich world. Elsewhere, as inflation exceeded central-bank targets, rate-setters tightened monetary policy in rough proportion to the size of their overshoot. If the Bank of Japan had behaved in a similar manner to its G10 peers, notes Tim Baker of Deutsche Bank, the country’s interest rates would have increased by two percentage points over the past few years. Instead, they barely crept up, rising from -0.1% to 0.25%, despite nearly three years of price growth above the BoJ’s target of 2%.”

Japan’s 40-Year Bond Yields Surpass 4% for First Time

The author writes, “Japan’s ultra-long-term borrowing costs have risen above 4 percent for the first time, as traders sell the country’s debt ahead of a snap election that could hand Prime Minister Sanae Takaichi a mandate to accelerate her stimulus plans. Yields on 40-year Japanese bonds surged 0.26 percentage points to 4.2 per cent on Tuesday, crossing above 4 per cent for the first time since their introduction in 2007 and pushing up borrowing costs around the world.”

Most Economists See Fed Holding Key Interest Rate Through March: Survey

The author writes, “Most economists are expecting the Federal Reserve to hold key interest rates steady, according to a Wednesday survey. A Reuters poll found that 58 percent of surveyed economists predict no change this quarter, while a majority expect two cuts later this year.”