Watched a YouTube breakdown recently about how Japan has basically been providing free liquidity to global markets for decades.
The way I understood it:
institutions were borrowing in Japanese Yen at near zero percent rates and using that money into higher yielding assets around the world; Essentially borrowing for free and making money on the spread.
Now Japan is raising rates. Which means that free liquidity is closing.
My gut reaction was: why is nobody treating this as a bigger deal? If massive amounts of institutional money was built on nearly free Japanese borrowing, what happens to those positions when the cost of borrowing in Yen goes up?
I'm a retail investor so I'm probably missing the obvious here.
A few things I don't fully understand:
-Is the scale of the Yen carry trade large enough to actually matter to US markets?
-When institutions have to exit those positions does that create a small wave or a tsunami?
-Is this already priced in or are markets underreacting?
Feels like one of those slow moving things that won't matter until suddenly it really does. Am I reading this right or overreacting?
Saw an infographic about Japan raising rates and it felt like a crack in the global financial system nobody is talking about. Am I understanding this correctly?
byu/Ok_Initiative_3515 ineconomy
Posted by Ok_Initiative_3515
2 Comments
The yen carry trade has been propping up the Fed’s Ponzi markets since time immemorial. But spiking Japanese bond rates will bring that party to a screeching halt.
Japan started hiking rates in early 2024. There was one market correction soon after the initial rate hike and then the market quickly recovered and made new ATH. It’s been over two years and it hasn’t affected the market other than the initial scare. I’m not going to worry about something that hasn’t played out in years. The Yen-carry-trade sounds to me like something that Youtubers rehash from time to time to get clicks.