The yen just hit a 40 year low and the next carry trade unwind could shake markets

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Something unusual is happening in Japan.

The yen just hit a 40 year low and Japan may need another $100 billion to fight back

Japan is running into a problem money alone cannot easily fix.

The USD/JPY pushed above 162.66, sending the yen to its weakest level since 1986.

Japanese Yen just broke! 🚨 It has now weakened beyond the 162 level against the U.S. Dollar for the first time since Ronald Reagan was President
byu/Boo_Randy_Revival inWallstreetsilver

Japan responded with massive intervention.

The government reportedly spent around $72 to $73 billion in April and May buying yen.

But after all that money, the currency kept weakening.

That tells investors something important.

Intervention can slow a move.

It cannot fix the bigger problem.

The main issue is the interest rate gap.

Japan still has much lower rates than the United States, making the yen one of the world’s favorite funding currencies.

Investors borrow cheap yen and use it to buy higher-yielding assets elsewhere.

The estimated size of that carry trade is massive, with some estimates ranging from $4 trillion to $8 trillion.

For years, that trade helped push money into stocks, bonds, and other risk assets.

But the same trade that boosts markets on the way up can create violent selling on the way down.

If the Bank of Japan is forced to raise rates faster, or if investors start rushing back into yen, the unwind could happen quickly.

Markets got a preview in August 2024, when a smaller BOJ rate move helped trigger a sharp selloff in Japanese stocks, pressure on the S&P 500, and a Bitcoin drop.

Now the numbers are bigger.

The yen is weaker.

The leverage is larger.

And global markets are more crowded.

The question is not whether Japan can defend the yen for one more week.

The question is what happens when one of the world’s biggest sources of cheap money starts disappearing.