Japan just dropped a $110B stimulus bomb, and global markets immediately felt the shockwave. The "Carry-Trade" just got smashed out of existence. The fallout will be everywhere, in everything, at the same time.
Bond yields jumped to 1.73%.
The US–Japan rate gap collapses from 3.5% → 2.4% in just ten months.
And with that, the math behind $1.2 trillion in global carry trades just broke.
The Trade That Carried the World
For 30 years, hedge funds ran the same play:
Borrow yen at 0% → Buy US stocks, Emerging Market debt, real estate, crypto → Pocket the spread.
With leverage? That became 40% annual returns for doing nothing.
But now the spread is gone — and after hedging, the trade is outright negative.
This isn't sentiment. It’s arithmetic.
Why This Happened
Japan’s stimulus isn’t creating inflation. It’s creating yield.
• Money velocity has collapsed to 1.42, down 29% since 2000
• Consumers save stimulus instead of spending it
• AI slashes service inflation by ~40%
• China exports deflation with industrial overcapacity
Prices stay flat, but bond yields rise because debt supply explodes.
Japan must issue $110B → buyers demand higher yields → debt service becomes a monster.
At 263% debt-to-GDP, every +1% in yield costs Japan $26B/year.
This forces yields higher… without inflation.
The Result
The interest-rate advantage vanishes.
Borrowing in yen to buy dollars now loses money.
So every institution running this trade faces the same choice:
Exit or bleed out.
Over $500B in carry positions must unwind.
No panic — just legal fiduciary requirement.
But the second wave is worse.
Japan Pulls Capital Home
Japanese institutions hold $3.2T in foreign assets.
For the first time in decades, domestic bonds actually pay something.
Capital repatriates.
The world’s biggest creditor becomes a seller, not a buyer.
When $800B of global liquidity exits, markets don’t drift down — they gap down until forced sellers meet any buyer at any price.
Here’s What the Models Show
• US equity multiples compress 21x → 16x
• Nikkei drops 12% as a stronger yen crushes exporters
• Emerging markets lose ~30% of external funding
• Credit spreads blow out 100 bps
Liquidity disappears.
Not because of recession — because the firehose of cheap yen is shutting off.
Enter the Fed
The Fed ending Quantitative Tightening on Dec 1 isn’t stimulus — it’s surrender.
They see Japanese capital evaporating.
The only buyer left for Treasuries… is the Fed itself.
This is fiscal dominance.
This is the regime change everyone ignored.
Deflation vs. Liquidity
Japan’s move proves the new global equation:
Technology deflates faster than government spending inflates.
The collision doesn’t create balance — it creates chaos.
Bottom Line
This isn’t a forecast.
This is the mechanical outcome of a yield shift in the world’s most overleveraged bond market.
Prepare for the regime break — or risk becoming part of the fallout.
This will hit everything, everywhere, at the same time..... $500 Billion in Japan "Carry-Trade" must now be sold-off or the Interest costs will break the people who borrowed Yen at Zero percent, to buy US Stocks. Five-Hundred Billion has to come out of the US markets ! ! ! ! !
UPDATE (FOR THE FIVE YEAR OLDS)
In the subscriber comments area below, quite a number of people have asked for a simpler explanation of what the story above reports. Here it is:
The interest rate on loans from Japan has been ZERO percent for years. Soooooooo, People and businesses borrowed money in Japan at zero percent Interest. They then converted the loan money from Japanese Yen to US Dollars, and used those dollars to buy stocks, bonds, make loans to Emerging markets and so forth.
After whatever fee they paid to convert the Yen to Dollars, all the Interest or dividends they received by having those stocks, bonds, and the loans they made to others, went directly into their pocket as profit.
Now, there is actual Interest to be paid on those Japanese loans. The loans aren't free anymore.
So now the people who bought all those stocks, bonds, or made loans to others have to get rid of what they bought or else they must start paying Interest n the Japan loans they took. That Interest is such that it will wipe out any profit they might be making, and end-up COSTING THEM more than they make every month. So they have to get rid of the loans fast, so they don't lose their shirts paying the new Interest.
That means they have to dump stocks, bonds, and whatever else they bought with the zero interest Japan loans.
All those stocks and bonds will start dropping in value as more and more people sell them to pay off their Japan loans. As the value drops, the people who took the loans are losing more and more every day, which will cause more and more of them to sell, which will cause more and more to lose money, so THEY have to sell as well. Think massive downward spiral.
This Japan "Carry trade" where they took zero interest loans from Japan, amounts to TRILLIONS of dollars in US Markets - with at least five hundred Billion being in US Stocks.
ALL OF THAT has to be sold-off to pay off the Japan loans.
I hope this update, helps.
