Brace For Impact.

TL;DR

Japan raising interest rates for the first time in 17 years is unwinding the yen carry trade, threatening to drain the global liquidity that propped up every major asset class.

Key Points

• 1.The yen carry trade worked by borrowing in yen at near-0% interest and investing in higher-yielding foreign assets like US Treasuries at 4%, pocketing the spread — estimated at its peak to be worth trillions of dollars globally.
• 2.When the Bank of Japan ended yield curve control and raised rates in 2024, the S&P 500 dropped 6% and Japan's Nikkei 225 fell over 12% in a single day — its worst drop since 1987.
• 3.Japan is the largest foreign holder of US Treasuries and the world's largest net creditor nation; if it stops buying, long-term Treasury yields must rise to attract replacement buyers regardless of what the Fed does with short-term rates.
• 4.Elevated long-term Treasury yields suppress stock valuations (by lowering the present value of future cash flows), keep mortgage rates high despite Fed cuts, and tighten corporate credit — affecting every major asset class simultaneously.
• 5.Ray Dalio warns the bond market is "the backbone of all markets," and a supply-demand breakdown there causes long rates to rise, currency to fall, and gold to rise — a dynamic already quietly unfolding.