Today, Japan's 10-year government bond yield temporarily rose to 2.93%.
This is the highest level in 30 years, since 1996.
The Nikkei Shimbun ran a headline stating, "3% is just a passing point."
Up to this point, it's just a story about "interest rates going up."
But what's truly scary isn't the interest rate itself. It's the "unwinding of the yen carry trade" that could happen next.
It happened once in August 2024. That was the day the Nikkei 225 plummeted by 4,451 yen in a single day.
The same structure remains this time. I will organize what is happening and what we should be wary of.
What is the Yen Carry Trade?
First, I'll explain the mechanism simply. The yen carry trade is roughly this kind of transaction:
1. Borrow Yen at low interest rates
2. Convert it to Dollars or other currencies
3. Buy US stocks, US Treasuries, high-interest currencies, crypto assets, etc.
As long as Japanese interest rates are low and overseas rates are high, this trade is profitable. You borrow at a low rate and invest at a high rate. The difference becomes profit. Furthermore, if the yen weakens, you also gain from exchange rate differences.
Hedge funds, institutional investors, and individual FX traders around the world are doing this.
The scale is estimated to reach tens of trillions of yen.
The problem is when this transaction goes into reverse.
What Happens When Unwinding Occurs?
Unwinding means closing out carry trade positions. The flow of liquidation is as follows:
1. Sell overseas assets (US stocks, crypto, etc.)
2. Sell Dollars and buy back Yen
3. Repay the borrowed Yen
In short, "risk assets are sold, and the yen surges." And this movement is self-amplifying.
Yen rises → Carry trade profits decrease → More liquidation → Yen rises further → More risk assets are sold.
It's a chain reaction where unwinding calls for more unwinding.
In August 2024, the Bank of Japan decided to raise interest rates, the yen surged, and the carry trade unwound. The Nikkei 225 fell by 4,451 yen on August 5th, recording its largest drop in history.
And now, that same structure is right in front of us again.
Organizing the Current Situation
Japan's 10-year bond yield: 2.93%
US 10-year bond yield: Approx. 4.7%
Japan-US interest rate gap: Approx. 1.8% (narrowing)
USD/JPY: In the 159 range
Probability of a BoJ rate hike in September: Approx. 80%
Here, I want you to notice one "strange state."
Even though Japanese interest rates have risen to 2.93%, the yen is still weak at 159.
Normally, when a country's interest rates rise, its currency gets stronger. This is because the currency of a high-interest country attracts funds seeking yield.
But now, even though Japan's interest rates are at a 30-year high, the yen remains weak.
This is a sign that "something will be corrected somewhere."
Either the yen's weakness will be corrected (= rapid yen appreciation), or the rise in interest rates will be corrected (= BoJ softens its tone).
The probability of one of these happening is increasing.
6 Warning Signs to Watch For
No one knows "when" the unwind will come. But we can predict "in what order" it will come.
Sign 1: 10-year bond yield breaks 3%
3% is a psychological milestone. The fact that the Nikkei Shimbun wrote "3% is a passing point" indicates that breaking 3% is near. The moment it exceeds 3%, the media will report it all at once, and an atmosphere of "interest rate shock" will spread.
Sign 2: BoJ raises rates in September
Whether a rate hike is decided at the September Monetary Policy Meeting, or Governor Ueda strongly suggests the "possibility of additional hikes." The market has already priced it in, but there will be an impact the moment it is actually decided. In July 2024, it was said that a "rate hike is priced in," but the yen surged after the actual decision.
Sign 3: USD/JPY plunges from 159 → 155 → 150
This is the most dangerous point. If USD/JPY moves 5 to 10 yen toward a stronger yen in a few days, it's a red light. A position built at 159 yen will incur an exchange loss of 9 yen if it hits 150. Investors who can't withstand this loss will start dumping positions. That triggers the chain of unwinding. If there is another intervention, a plunge toward 150 is possible.
Signal 4: VIX (Fear Index) rises
If the VIX exceeds 20 and climbs to 25 or 30, it's evidence that overall market risk aversion has begun. During the crash on August 5, 2024, the VIX jumped to 65. If the VIX starts to spike, it's a sign that the unwind has begun in earnest.
Signal 5: Nasdaq and Bitcoin plummet
The destinations for yen carry funds are mainly US stocks (especially tech) and crypto assets. If a day comes when the Nasdaq falls more than 3% and Bitcoin falls more than 10% in a single day, it's evidence that the impact of the unwind is spreading to risk assets.
Signal 6: Further Yen buying
By this point, we enter a self-amplifying phase where unwinding calls for more unwinding. Yen rises → More position liquidation → Yen rises further → More risk assets sold. August 5, 2024, was this phase. It only stops when the BoJ suggests it will "stop raising rates" or when positions are sufficiently liquidated.
Why it's even scarier this time
There is a difference from August 2024.
In 2024, only Japanese interest rates were rising. This time, long-term interest rates in both Japan and the US are rising.
- Japan 10Y: 2.93% (30-year high)
- US 30Y: In the 5% range (19-year high)
In other words,
"Japanese rate hike + Yen carry unwind + US long-term rate hike"
If these three come at the same time, global leverage could drop all at once.
Rising interest rates = rising borrowing costs = inability to maintain leverage.
Assets that have benefited most from leverage will be sold the most.
Specifically:
- High PER growth stocks
- AI-related stocks
- Crypto assets
- Small-cap growth stocks
If interest rates rise globally, these are the first to shrink.
Conversely, which assets are strong against rising rates?
Not everything goes down.
There are assets that benefit from rising interest rates.
- Bank stocks: Margin expansion (though they may be sold temporarily if the yen appreciation is too rapid)
- Insurance stocks: Improved investment yields
- Short-term bonds: Securing yield
- Cash: An era where cash earns interest (deposit rates are also rising)
- Value stocks: Low PER and resilient to rising rates
And "structural stocks" like defense and shipbuilding, where the future can be read through order backlogs, won't see those orders disappear regardless of how interest rates move.
What should you do as an investor?
We don't know if the unwind will come. But we can prepare for when it does.
Action 1: Watch USD/JPY daily
If you only follow individual Japanese stock news, you'll miss macro changes. USD/JPY is now one of the most important indicators for Japanese stocks. Be especially careful if it starts running sharply toward 150.
Action 2: Check your portfolio leverage
If you use margin trading, check your collateral maintenance ratio. If an unwind comes, margin calls will occur all at once. On August 5, 2024, the amount of margin calls generated was the largest in history.
Action 3: Be conscious of your cash position
A crash is an opportunity for those who have cash. If a crash comes while you are fully invested in stocks, you can't move. Just holding 10-20% cash changes your options during a crash.
Action 4: Create a "stocks I want to buy in a crash" list
When an unwind comes, both good and bad companies are sold together. The moment excellent companies are sold unfairly cheap is the greatest opportunity for long-term investors. You must make the list before the crash, or you won't be in time.
Summary
Now, "before something happens," is the most important preparation period.
On August 5, 2024, the crash came suddenly.
(But signals were appearing beforehand)
The results differed greatly between those who were watching and those who weren't.
It's the same this time.
The signals are already starting to light up.
