Japan's Bond Market Turmoil Sparks Global Risk of Yen Carry Trade Unwind

In a video analysis, World Affairs In Context (@lenapetrova) examines how turmoil in Japan's massive government bond market is creating systemic risks for global finance. The core issue is the potential unraveling of the "yen carry trade," a decades-old strategy where investors borrow cheap yen to fund investments in higher-yielding assets abroad. This system, described as the world's "financial shock absorber," relied on Japan's persistently low interest rates.

Recent market shocks, including a sharp quarter-point surge in Japanese bond yields in a single session, signal a structural shift. The driver is a changing policy environment in Japan, where rising domestic inflation and government stimulus plans are pressuring the Bank of Japan to normalise monetary policy. As yields rise in Japan, the math behind the yen carry trade breaks down, incentivising a repatriation of capital.

The analysis argues this is not a local story. Japan is the largest foreign holder of U.S. Treasuries, and its financial institutions hold trillions in global assets. A forced unwind could lead Japanese investors to sell foreign holdings, potentially raising borrowing costs in the U.S. and Europe. This market stress and the resulting yen volatility have become a central topic of concern among global policymakers and investors.

Source: JAPAN SHOCK: $7 Trillion Bond Market MELTDOWN and the Beginning of Yen Carry Trade Unwind (Video: https://www.youtube.com/watch?v=WL42N22XUK0)