This has much less to do with trade than everyone thinks.
BOJ is literally intervening daily in their currency to keep it from gaining value as their long yields continue to stay elevated.
For those who still don't know how the financial world works, there's a thing called the Yen carry trade. This involves posting collateral to sell the Yen (JPY), then taking the proceeds and funneling it into mostly American equity markets and treasuries. This is what has kept the bond market from tanking. This is what has kept liquidity plentiful in our stock market. This is a huge part of what buys the dip.
And it works. The money they made from naked selling the JPY is now making even more money from a rising American stock market, as well as mostly "safe" in the American "risk-free" asset (bonds) that will always somehow pay original principal back plus an ongoing yield GREATER than the cost of servicing the margin on the carry trade.
Until JPY rises like it did leading into August 2024 and March/April 2025. Because when that happens, all of the sudden the short play on JPY starts LOSING money, and requires significantly more capital calls to service the margin requirement. Sometimes those who are overlevered have to close at a loss. What happens when all the money that has poured into US equities is at risk all of the sudden? They sell equities to service their margin and debt requirements. That's why August 24 and April 25 seemed so crazy so quick. Why it affected every single market in every country. Why it hit commodities, metals, and crypto. Money had to be raised to service the underwater balance. It's called a short squeeze.
And those two instances were barely blips on the radar. The real risk is the JPY rising even higher than that. It would literally tank global markets that are all interlinked with roundabout funds overnight. It would be recession causing, almost instantly, as a big enough loss would wipe money out of existence and there wouldn't be anything left to buy back in.
Back to the main point. Japan is intervening in their currency almost daily, sometimes multiple times a day. They have no choice. If they sell equities and treasuries in mass to make their short carry trade less risky, they tank the global financial market. If JPY rises too much, they go massively underwater and HAVE to sell everything to salvage anything from the carry trade. They have no choice but to continue to expand money supply to keep the music playing.
A deal like this is Trump knowing he has them by the balls. All he has to do is threaten their economy with tariffs and Japanese bonds blow out to the upside, causing JPY to follow. He can tank Japan (and the world) with a tweet. They know this. They have no choice but to cave to his every demand. And all of this money they are giving us.. they've already been funneling it into our markets. This is just him redirecting it to exactly where he thinks it helps US the most.
But it's a dangerous game. One that nobody can ultimately control. One thing goes wrong, and it doesn't matter who you are.. the whole thing unravels. Bye bye global financial market.
