The Yen Carry Trade

The Fate of Global Finance Now Hangs on one metric: the yen-dollar exchange Rate. A storm may be brewing.

For decades, Japan kept interest rates near zero. The yen stayed weak. Together, they created the most powerful arbitrage in global markets: the yen carry trade.

Here’s the simplest example, assuming a constant 100 yen per US Dollar exchange rate:
1. Borrow 100 yen from the Bank of Japan at almost 0%
2. Convert it to 1 US dollar
3. Invest in a 10-year T-Bill at 2% → it becomes $1.20
4. Convert back at the same rate → 120 yen
5. Return 100 yen
6. Keep 20 yen profit

No risk. No effort. Scale this into billions and trillions, across bonds, stocks, real estate, even crypto — and you see why Japan became the world’s biggest lender.

But this only works if:
1️⃣ Japanese rates stay near zero
2️⃣ The yen does not appreciate because you have to pay back the loan in yen

Now one of them has broken.
Inflation has returned. Japanese yields (and interest rates) are rising. This means the era of free money from near-zero borrowing costs is ending. If higher rates attract global capital back into Japan, the yen could strengthen. And once the yen strengthens, the yen carry trade stops being profitable.

Here’s the previous example with the yen appreciating against the US Dollar:
1. Borrow 100 yen at 0%
2. Convert to 1 USD
3. Invest in a 10-year T-Bill at 2% → becomes $1.20
4. Convert back at an appreciated exchange rate (e.g., 50 yen per USD) → 60 yen
5. You owe 100 yen
6. Loss: 40 yen

When this happens at scale, investors worldwide may have to sell their positions/assets to repay yen loans. The act of paying back the loan in yen could further strengthen the yen, leading to more selloff across the world. A classic feedback loop.

As Nassim Nicholas Taleb warns, in an interconnected world, Black Swans become more common. The yen carry trade is one such hidden point of fragility.

And today, the fate of global finance may rest on one number:
The yen–dollar exchange rate.