The explosion of the “greatest carry trade in financial history,” explaining how for 30 years, Japan’s zero-interest policy artificially suppressed borrowing costs worldwide, fueling everything from cheap mortgages to sky-high stock multiples.
For risk assets, the sudden reversal of the decades-old yen carry trade is the actual nightmare. For years, global funds borrowed almost gratis yen and injected the revenue— estimated at more than $3.4 trillion—into everything from Bitcoin to U.S. equities. As Japanese yields rise, that trade is unwinding swiftly: Japanese life insurers and pension majors are repatriating capital from U.S. Treasuries (perhaps withdrawing >$1 trillion in liquidity), while higher financing costs are causing leveraged investors to deleverage. Goldman Sachs adds that every 10 bp increase in JGB yields pushes U.S., European, and U.K. bond yields by 2–3 bps, hence generating a worldwide tightening wave that suppresses demand for speculative assets.