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The End of Free Money: How Japan's Policy Shift Threatens Global Risk Assets

Marcus LeeMonday, May 12, 2025 11:48 pm ET

80min read

BTC --

Japan’s 30-year bond yields have surged to their highest levels since the 2008 financial crisis, reaching 2.85% in early May 2025, up from 2.33% at the start of the year. This seismic shift, driven by inflation, fiscal reforms, and global bond market pressures, signals a pivotal moment for global investors. The era of cheap yen funding—the foundation of the carry trade—is ending, and the repercussions could drain liquidity from equities, cryptocurrencies, and emerging markets. Here’s why this matters and what investors must do now.

The Carry Trade Unwind: A Liquidity Tsunami

For decades, the yen carry trade has been a cornerstone of global risk-taking. Investors borrowed yen at near-zero rates from Japan’s ultra-loose monetary policy, then invested the funds in higher-yielding assets: U.S. stocks, crypto, Chinese real estate, and emerging-market bonds. But rising Japanese yields are upending this calculus.

As Japan’s 30-year yields approach 3%—a level not seen since 2000—the cost of borrowing yen is skyrocketing. The Bank of Japan (BoJ) faces a stark choice: let yields climb further, risking a bond market rout, or tighten policy to stabilize rates. Either path spells trouble.

Option 1: If the BoJ intervenes (e.g., raising rates or shrinking its bond holdings), the yen will surge, forcing carry traders to unwind positions. This creates a liquidity vacuum as funds flow back to Japan, starving risk assets of capital.
Option 2: If yields keep rising organically—due to inflation or fiscal spending—the cost of the carry trade becomes uneconomical, triggering the same unwind.

Either way, global markets face a liquidity drain. The yen carry trade’s unwind has already begun: the yen has rallied 5% against the dollar since early 2025, and short-term borrowing costs (e.g., 3-month yen LIBOR) are spiking.

The Domino Effect on Risk Assets

The unwind is no mere technical adjustment—it’s a systemic threat.

Equities: The S&P 500’s 18% rally in 2024 was fueled partly by yen-funded inflows. As capital retreats, momentum could stall. Tech stocks, which rely on cheap debt, are especially vulnerable.
Cryptocurrencies: Bitcoin’s recent rebound to $100,000 was partly backed by leveraged yen trades. A yen rally could trigger margin calls, sparking a crash.
Emerging Markets: Countries like Turkey and Argentina, which depend on dollar-denominated debt, face higher refinancing costs as global liquidity dries up.

Why This Is Different From 2013

Skeptics might dismiss this as another “taper tantrum,” but the stakes are higher today.

Structural Shift: Japan’s rising yields aren’t a temporary blip. Inflation, now at 3.6%, and fiscal reforms (e.g., defense spending hikes) ensure yields stay elevated.
Global Interconnectedness: The yen carry trade now funds everything from meme stocks to NFTs. A 1994-style unwind—when the yen’s surge caused Mexico’s peso crisis—could be far worse.
Central Bank Constraints: The Fed and ECB are already tightening. A BoJ rate hike would mean all major central banks are simultaneously draining liquidity, a first in modern history.

What to Do Now: Sell Risk, Buy Bonds

The playbook is clear: exit speculative assets and pivot to safety.

Reduce Exposure to Carry-Trade-Driven Assets:
Equities: Trim tech and growth stocks.
Cryptocurrencies: Close leveraged positions.
Emerging Markets: Avoid dollar-denominated debt.
Hoard Safe-Haven Assets:
Japanese Government Bonds (JGBs): With yields nearing 3%, JGBs offer a rare combination of safety and yield.
Inflation-Linked Bonds: TIPS or German Bunds with inflation swaps.
Yen: A rising yen is a hedge against the carry trade unwind.
Cash Is King: Don’t underestimate the value of liquidity. A 20-30% cash allocation provides flexibility in volatile markets.

The Bottom Line: A New Era of Risk

The era of free money is ending. Japan’s bond market is sending a warning: the era of limitless liquidity is over. Investors who cling to risk assets will face a reckoning. Those who pivot to safety—JGBs, cash, and inflation hedges—will weather the storm. The time to act is now.

Investors: Sell risk, buy bonds, and brace for the unwind.

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