Yen Carry Trade Loses Dominance
Kobeissi stated that the historical correlation between USD/JPY and the US-Japan 10-year yield spread has broken down after April 2025, leading to a significant decline in the dominance of carry trades on the exchange rate.
In the high volatility environment following "Liberation Day," some yen borrowing positions were forced to close, while Japan's debt burden and repayment costs began to directly affect yen pricing.
Capital flows are shifting from being driven by yield spreads to being driven by volatility and fiscal expectations, with buying pressure leaning towards USD assets for safety, while selling pressure comes from the continued unwinding of yen financing carry trades; Japan's long-term debt pressure has become a new main variable.
Source: Public Information
ABAB AI Insight
The yen carry trade has not suddenly disappeared but has undergone two rounds of structural shocks: one triggered by the BOJ's unexpected rate hike in the summer of 2024, leading to global deleveraging, and another after April 2025, where trade war uncertainties raised volatility, forcing positions borrowing yen to buy USD assets to continuously retreat. Historically, these types of trades fear not just the narrowing of yield spreads but also rising volatility that increases financing costs and risk control thresholds.
In terms of capital flows, carry trades originally directed Japan's low-cost liabilities towards US stocks, US bonds, and high-yield assets, but now the market is beginning to reprice Japan's fiscal side: debt service costs, long-term government bond yields, and government financing pressures are all squeezing the traditional weak logic of the yen. In other words, the yen is no longer just a "low-interest currency" but is being repriced as a "high-debt currency."
Comparable historical cases are the collapses of global leveraged trades around 1998 and 2008: as long as the stability of the funding currency or policy expectations shift, all cross-border positions relying on it will be simultaneously pressured. The current situation resembles a phase where "fiscal narratives take over exchange rates," rather than a simple yield spread trading cycle.
Essentially, this represents a transfer of pricing power: previously, the USD/JPY was determined by the US-Japan yield spread, but now it is jointly priced by Japan's debt sustainability, market volatility, and position crowding; the reason this occurs is that when central bank policies are overshadowed by fiscal realities, exchange rates will first reflect repayment risks rather than simply reflecting yield differentials.
ABAB News · Cognitive Laws
- Yield spreads determine direction, volatility determines survival.
- Leverage earns time, drawdowns consume principal.
- When fiscal narratives take over exchange rates, trading logic becomes ineffective.