The yen carry trade involves borrowing money at Japan's low interest rates to invest in higher-yielding assets elsewhere; when investors simultaneously exit this trade by selling investments, converting back to yen, and repaying loans, it creates market chaos, liquidity crises, and panic, as demonstrated by the US market's role as a major holder of Japanese carry trade positions.
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Japan Market ChaosAdded:
They sell their investments, pull the money out of the stocks, dump some of the bonds off as well, and then they exit the risky asset. Then they convert everything back into yen so they can repay the loans.
But when millions or even trillions, as we'll see here, try to move at the same time, it creates a lot of chaos in the market. And the US market is one of the main holders of this kind of Japanese carry trade. And it can swing the prices wildly, liquidity disappears, and everyone and everyone kind of starts to panic a little bit in there. As I said, we've already kind of seen that in 2024 and subsequent years that have passed or last 18 months, the unloading of US debt for those people that are trying to exit that trade.
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