It’s a bit complicated, but in short, today is a bank holiday both for the US and for Japan. And the Japanese Yen carry trade is likely unwinding in that time.

Last Friday, the stock market fell pretty hard as well as the crypto markets. This means people were selling what they had of each at a very high rate. When that happens, financial institutions have a bunch of mechanisms to absorb that loss and redirect it.

But one of the biggest mechanisms to do that, the Japanese Yen Carry Trade, has been unwinding over the weekend.

This is not only a bad thing, but is also what caused the 2008 crisis to accelerate.

Here’s a quick overview of what that is, and what’s happening to it now:

https://www.linkedin.com/pulse/unwinding-yen-carry-trade-dawn-new-monetary-era-harshad-shah-bgnvf

For thirty years, the Bank of Japan (BOJ) maintained an ultra-loose monetary policy, with interest rates often at or below zero. This created a perverse incentive for the global financial community: borrow massive amounts of Japanese yen for almost no cost, convert it into other currencies like the US dollar or euro, and invest those proceeds in higher-yielding assets abroad—US Treasuries, European bonds, Brazilian debt, Asian equities, and real estate. This trade was the quiet lifeblood of global asset prices. It suppressed borrowing costs for governments and corporations worldwide, inflated valuations, and encouraged risk-taking.

So, the Yen Carry Trade was a way for big institutions to safely buy Yen and convert it to other high yielding assets. When the market is going down, as it was on Friday, instutions would buy Yen at less than 0% interest then divert it to high yield assets that would offset their losses. In short (and simple example), if the stock market fell 10%, they’d buy Yen, then use it to get some high yield assets at above a 10% return.

But! The Yen carry trade ALSO “inflated valuations.” Companies could use this trade to hide the actual value of their assets. Usually through combining a bunch of other instruments, including some illegal mechanisms that are still legal in the US like naked short selling.

So, the Yen carry trade let Wallstreet inflate their valuations to lure in investors. AND offset losses when they were being too risky.

So the question is: how much longer can they pretend to be valued higher? How much longer can they offset losses and still keep going?

Seeing as how the Japanese Yen Carry trade is a key to both, it’s a critical tool needed for companies not to collapse back to their actual value.

And as of this weekend, that tool no longer works. As the BOJ (Bank of Japan) raised their interest rates to a level never before seen. Because:

Japan is now confronting persistent, above-target inflation. This economic sea change has forced the BOJ to cautiously abandon its yield curve control policy, allowing Japanese Government Bond (JGB) yields to rise. The 40-year JGB yield’s surge from 1.5% to 3.4% in just two years is not a mere statistical blip; it is one of the fastest and most significant monetary shifts in the modern era.

The implications are profound. For a Japanese pension fund or insurance company, the calculus has fundamentally changed. Why shoulder the currency risk and geopolitical uncertainty of US Treasuries when you can now secure a attractive, risk-free yield at home in your own currency? The logical, and indeed necessary, response is repatriation.

Repatriation = Permanant death of the Yen carry trade.

So in short, the tool every major US institution has been using to inflate their own values and cover their losses will likely no longer be working as of today. And that’s after a very rough Friday for them. The tool they usually use to recover from that kind of loss is now broken.

Since it’s a bank Holiday, we won’t know until tomorrow, but with how high silver and gold prices are getting, that tends to indicate smoke before the fire. The last time Japan raised their rates like this it was followed by the 2008 crisis, and the 1998 crisis before it.

So whatever happens next likely isn’t great, but that will depend on how honest Wall Street has been since Covid. And from what I can see, they have basically created another “Big Short” situation as they never learned the first time.

Imo, outside the above, and in addition to it, ETFs are a time bomb just like mortgages were in 2008. There is very likely a looming ETF crisis similar to the mortgage crisis with just a matter of time before they explode, and something like the Yen Carry Trade unwinding could cause it.

If that happened, a depression event is almost certain. As ETFs have secretly replaced everyone’s 401ks in the last decade. So instead of losing an overpriced mortgage, if there is an ETF bubble, and it pops, people lose their retirements.

Which is something that very much could be starting tomorrow. Depending on how many other tools are left to contain what the Yen carry trade was doing. AND how fraudulent ETFs are. But that’s a very big other conversation.

In short - Wallstreet has one less cheat code to prevent their bullshit from leaking out into the market and rest of the world like it did in 2008. We’ll know tomorrow how needed those cheat codes were.

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