It’s been two years since the Bank of Japan shocked markets with a surprise policy rate increase of 0.25% that helped trigger a violent unwind of yen-funded trades. On August 5, 2024, the VIX spiked as much as 180% intraday to 65.73 before closing at 38.57, and equities reeled. At the time, this squeeze propped up its currency against further devaluation and caught billions of carry trade participants with their pants down. Looking at today’s news, we would be hard-pressed to see that anything really changed. The recent story is familiar: the yen hitting multi-decade lows as central banks step in to support its value, pressure hits arbitrage investors, and ultimately money flows back to Japan.
For years, the “piggybank for the world” invested in external bonds, Treasuries, and foreign equities. With rising Japanese rates and a stronger yen, some of these savings might return home – and out of everyone else’s markets. Structural problems remain. Will we be repeating this cycle again in 2028?
Last Time
We covered the brief collapse in the carry trade in an August 2024 article. To recap, for years the Bank of Japan maintained a -0.1% policy rate with capped bond yields. You would loan them money and they would pay you back less than they borrowed. Naturally, traders found a way to exploit this oddity. They would incur debt in Japan and invest it elsewhere for a higher rate. This works until rates change or the value of the currency increases. Predictability is key. When even the smallest rate hike occurred unexpectedly, the market reacted in a big way.
Current Environment
Major structural issues still constrain the Bank of Japan from raising rates to a level consistent with the rest of the world. A high debt-to-GDP ratio along with aging demographics, is a warning sign for its economists that growth rates will continue to slow.
The charts below show this age imbalance. This contributes to the population decline since 2011, which shows no end in sight.
Combine that with the debt load and the options look ugly: raise rates enough to create demand for JGBs and support the yen, or try to reverse population decline. The first grows the interest bill. The second takes decades. From 2013 through the early 2020s they chose a third path—massive bond buying and a cheap yen. That is no longer the official plan. Since 2024 the BOJ has been hiking and tapering JGB purchases toward about ¥2 trillion a month from April 2027. The stock of bonds they already own is enormous. The flow of new purchases is shrinking. The live political tension is Takaichi’s fiscal easing versus Ueda’s normalization, not a return to full QE.
The 2026 Intervention
On 31 July 2026 the U.S. Treasury bought yen—selling euros through the New York Fed—in a joint operation with Japan, the first yen-support operation of that kind since 1998. Tokyo and Washington confirmed it around 2–3 August. Treasury Secretary Scott Bessent framed it as a response to “disorderly” yen moves. The yen had been near a 40-year low against the dollar, around 164, and the slide looked like it was accelerating. On the other side, the Ministry of Finance decides intervention; the Bank of Japan executes it. Estimates put the U.S. contribution near $500 million. Japan for their part spent a record ¥15.4 trillion, about $96–99 billion, from 30 July through 26 August, with the heaviest buying on 30–31 July. You can see the results in the chart below.
The Outlook
A depreciated Yen helps Japanese exports by making them cheaper in other currencies.
An Example
On January 1, 2026, ten U.S. dollars 1,568 Yen
By July 24, 2026 that same ten dollars was worth 1,639 Yen
This means that a widget that sells for $10 made 4.5% more in Yen terms without the manufacturer changing anything (assuming all materials and wages stayed the same in yen)
The Trump administration wants more balanced trade, which requires Japan to buy more U.S. goods. A stronger U.S. dollar makes this more difficult. Bessent indicates that he would like Japan to raise their bond rates to a neutral level. BOJ staff have put that zone roughly around 1.1–2.5%. Markets expect a move from 1.00% to 1.25% at the mid-September meeting. This level, however, would accelerate their debt load and set them up for future weakness (again). The Takaichi government prefers growth and is restocking the BOJ board with doves who are reluctant to move much higher.
Ironically, the rate gap and flailing currency also support massive demand for US debt and risk assets. It isn’t just savvy investors who take advantage of the carry trade differential. Japanese corporations and investors do as well, including pension funds, insurers, and individuals. A declining currency that does not pay market interest rates encourages offshoring of all savings. This “exporting” of Japanese savings is estimated at a total of $11.5 trillion U.S. dollars. While much of this is in factories and subsidiaries which aren’t movable, approximately $5 trillion is in securities, which includes $1.2 trillion in U.S. Treasuries, sit outside their borders. They own the most US debt of any foreign holder.
So, what would happen if they began to liquidate their holdings? While a full liquidation is not a real threat, the reaction to a few hundred billion dollars extracted per year would be significant. The yen would appreciate. This would hit the remaining carry trade and force more covering, sending money back to Japan. Softer demand for US treasuries would drive yields up on US debt and require higher rates. Mortgage rates, auto loans, and corporate borrowing would become more expensive as would the cost of servicing US federal debt. Inflation could shift onto US markets if rates do not rise quickly while moderating on their mainland. In short, a small amount would be absorbable and a large amount could send shockwaves through US markets.
Conclusion
Demographics and a massive debt load still argue that Japan will keep a relatively cheap currency and hike only slowly. Normalization is underway, from negative rates to 1.00% and likely 1.25%. The United States has now joined a yen-support operation, more as a signal than as size. The pain of faster tightening and tighter fiscal policy is still something Tokyo would rather pace than rip off. While that may not seem like much, it is a far cry from negative interest rates from previous decades. I expect another squeeze-and-intervention cycle within a few years. I am thankful for the materials to write about.Sources:
https://worldpopulationreview.com/countries/japan
For years, the “piggybank for the world” invested in external bonds, Treasuries, and foreign equities. With rising Japanese rates and a stronger yen, some of these savings might return home – and out of everyone else’s markets. Structural problems remain. Will we be repeating this cycle again in 2028?
Last Time
We covered the brief collapse in the carry trade in an August 2024 article. To recap, for years the Bank of Japan maintained a -0.1% policy rate with capped bond yields. You would loan them money and they would pay you back less than they borrowed. Naturally, traders found a way to exploit this oddity. They would incur debt in Japan and invest it elsewhere for a higher rate. This works until rates change or the value of the currency increases. Predictability is key. When even the smallest rate hike occurred unexpectedly, the market reacted in a big way.
Current Environment
Major structural issues still constrain the Bank of Japan from raising rates to a level consistent with the rest of the world. A high debt-to-GDP ratio along with aging demographics, is a warning sign for its economists that growth rates will continue to slow.
The charts below show this age imbalance. This contributes to the population decline since 2011, which shows no end in sight.
Combine that with the debt load and the options look ugly: raise rates enough to create demand for JGBs and support the yen, or try to reverse population decline. The first grows the interest bill. The second takes decades. From 2013 through the early 2020s they chose a third path—massive bond buying and a cheap yen. That is no longer the official plan. Since 2024 the BOJ has been hiking and tapering JGB purchases toward about ¥2 trillion a month from April 2027. The stock of bonds they already own is enormous. The flow of new purchases is shrinking. The live political tension is Takaichi’s fiscal easing versus Ueda’s normalization, not a return to full QE.
The 2026 Intervention
On 31 July 2026 the U.S. Treasury bought yen—selling euros through the New York Fed—in a joint operation with Japan, the first yen-support operation of that kind since 1998. Tokyo and Washington confirmed it around 2–3 August. Treasury Secretary Scott Bessent framed it as a response to “disorderly” yen moves. The yen had been near a 40-year low against the dollar, around 164, and the slide looked like it was accelerating. On the other side, the Ministry of Finance decides intervention; the Bank of Japan executes it. Estimates put the U.S. contribution near $500 million. Japan for their part spent a record ¥15.4 trillion, about $96–99 billion, from 30 July through 26 August, with the heaviest buying on 30–31 July. You can see the results in the chart below.
The Outlook
A depreciated Yen helps Japanese exports by making them cheaper in other currencies.
An Example
On January 1, 2026, ten U.S. dollars 1,568 Yen
By July 24, 2026 that same ten dollars was worth 1,639 Yen
This means that a widget that sells for $10 made 4.5% more in Yen terms without the manufacturer changing anything (assuming all materials and wages stayed the same in yen)
The Trump administration wants more balanced trade, which requires Japan to buy more U.S. goods. A stronger U.S. dollar makes this more difficult. Bessent indicates that he would like Japan to raise their bond rates to a neutral level. BOJ staff have put that zone roughly around 1.1–2.5%. Markets expect a move from 1.00% to 1.25% at the mid-September meeting. This level, however, would accelerate their debt load and set them up for future weakness (again). The Takaichi government prefers growth and is restocking the BOJ board with doves who are reluctant to move much higher.
Ironically, the rate gap and flailing currency also support massive demand for US debt and risk assets. It isn’t just savvy investors who take advantage of the carry trade differential. Japanese corporations and investors do as well, including pension funds, insurers, and individuals. A declining currency that does not pay market interest rates encourages offshoring of all savings. This “exporting” of Japanese savings is estimated at a total of $11.5 trillion U.S. dollars. While much of this is in factories and subsidiaries which aren’t movable, approximately $5 trillion is in securities, which includes $1.2 trillion in U.S. Treasuries, sit outside their borders. They own the most US debt of any foreign holder.
So, what would happen if they began to liquidate their holdings? While a full liquidation is not a real threat, the reaction to a few hundred billion dollars extracted per year would be significant. The yen would appreciate. This would hit the remaining carry trade and force more covering, sending money back to Japan. Softer demand for US treasuries would drive yields up on US debt and require higher rates. Mortgage rates, auto loans, and corporate borrowing would become more expensive as would the cost of servicing US federal debt. Inflation could shift onto US markets if rates do not rise quickly while moderating on their mainland. In short, a small amount would be absorbable and a large amount could send shockwaves through US markets.
Conclusion
Demographics and a massive debt load still argue that Japan will keep a relatively cheap currency and hike only slowly. Normalization is underway, from negative rates to 1.00% and likely 1.25%. The United States has now joined a yen-support operation, more as a signal than as size. The pain of faster tightening and tighter fiscal policy is still something Tokyo would rather pace than rip off. While that may not seem like much, it is a far cry from negative interest rates from previous decades. I expect another squeeze-and-intervention cycle within a few years. I am thankful for the materials to write about.Sources:
https://worldpopulationreview.com/countries/japan
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.