The Hidden Risk in Japan That Could Collapse Global Economies

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Aug 12, 2025

Explore the intricacies of Japan's carry trade and its potential impact on global markets. The discussion reveals how Japanese companies are adapting their investment strategies amid rising risks. Key insights on the relationship between the yen and government bonds highlight significant economic implications. As the macroeconomic landscape worsens, this analysis raises critical warnings about future stability.

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INSIGHT

Carry Trade As A Global Conduit

Japan's carry trade is a systemic conduit that redistributes dollars globally via eurodollar channels.
Risk aversion in Japan can trigger large global monetary and financial consequences when carry trades reverse.

INSIGHT

How Japanese Firms Move Dollars

Major Japanese firms swap yen collateral into dollars and then reinvest globally through eurodollar balances.
These swaps amplify global credit flows and make Japanese risk appetite highly consequential for world markets.

INSIGHT

Reaching For Yield And The Repricing Shock

Japanese investors reached for yield by buying riskier corporates when US short-term rates were expected to stay high.
When US macro risks rose, that risk-adjusted return collapsed and forced Japanese selling of junk assets.

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The macro situation is worse this summer compared to last summer, so where's Japan's carry trade? If the July 2024 jobs report provoked a violent financial backlash, you'd think the July 2025 version would have, too. The fact it didn't points to several key developments, important warnings from JPY and JGBs.

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