The Great Yen Deception: Why the Carry Trade Isn’t Over—It’s Evolving
How a Fiscal Panic in Japan Could Fuel the Next Rally in US Growth Assets
I wish to thank NYUGrad (NotYourAdvisor) for his post today that included this video:
Over the past week, global markets have been rattled by a sudden “risk-off” rotation. Headlines warn of an unwinding yen carry trade, triggered by hawkish signals from the Bank of Japan and rising global yields. According to the dominant narrative, this could spell disaster: investors repatriating capital, liquidity drying up, and a broad-based selloff in risk assets.
But what if the market is reading the wrong playbook?
After five decades in finance, I’ve learned that why yields rise matters more than that they rise. And right now, the evidence suggests a different story—one not of carry trade collapse, but of fiscal fear in Japan that could ironically strengthen the case for US growth equities.
The Bear Case: A Mechanical Unwind
The conventional view goes like this:
1. The Bank of Japan hints at policy normalization.
2. Japanese government bond (JGB) yields rise, narrowing the interest rate gap with the US
3. Investors unwind yen-funded positions, repatriate capital, and trigger a global liquidity crunch.
4. The yen strengthens, risk assets sell off indiscriminately, and volatility spikes.
This logic is clean, intuitive, and widely believed. It’s also, I argue, fundamentally flawed.
The Bull Case: Fiscal Dominance, Not Tightening
My thesis rests on a critical distinction: rising Japanese yields are not a sign of successful monetary tightening, but of fiscal distress and currency crisis fears.
Here’s the evidence:
1. The November Anomaly
When JGB yields rose recently, the yen weakened—not strengthened. This is impossible under the carry-unwind theory but perfectly consistent with investors losing confidence in Japan’s sovereign creditworthiness.
2. The BoJ’s Impossible Position
Japan’s economy is shrinking. Its debt-to-GDP exceeds 260%. Any meaningful rate hike would risk a sovereign debt crisis. The BoJ’s “hawkishness” looks more like performative theater than actionable policy.
3. Capital Flows Tell the Real Story
Record foreign demand at recent US Treasury auctions directly contradicts the “repatriation” narrative. Capital isn’t fleeing the US—it’s flooding in. Japanese investors aren’t bringing money home; they’re fleeing domestic fiscal risk.
4. Asset Price Behavior Confirms Selective Rotation
While some high-beta assets have sold off, quality US growth names like MongoDB have surged. This isn’t panic liquidation; it’s discriminating capital rotation toward productive assets—exactly what my bull case predicts.
Why the Bear Narrative is Mechanistically Flawed
The standard story assumes:
The BoJ can tighten meaningfully (it can’t).
Japanese investors want to repatriate (they don’t).
The yen strengthens with rising yields (it’s weakening).
In reality, we’re witnessing fiscal dominance: yields are rising because of fear over Japan’s unsustainable debt trajectory, not because of credible monetary tightening.
What Comes Next: A Scenario for the Next 45 Days
If I’m right, expect:
1. The BoJ to talk tough but deliver minimal action—perhaps 25–50 bps stretched over quarters.
2. The yen to continue weakening even as JGB yields rise, reinforcing fiscal crisis dynamics.
3. US assets, especially productive growth equities, to outperform as capital seeks a safe haven.
4. The “risk-off” narrative to fade as a Santa Rally emerges, fueled by liquidity that never actually vanishes.
5. A growing bifurcation between quality US growth and everything else.
The Key Tell to Watch
Monitor the yen/JGB yield relationship. If yields keep rising while the yen stays weak or weakens further, my fiscal crisis interpretation is validated. In that scenario, the carry trade doesn’t die—it evolves, remaining viable or even strengthening as US-Japan rate differentials widen without yen appreciation.
Bottom Line
The market is conflating two very different things: a controlled policy normalization and a loss of fiscal confidence. The first would kill the carry trade; the second could extend it in new forms while channeling capital toward US growth assets.
Don’t fear the unwind. Understand the why.
The next rally may be born not in spite of Japan’s crisis, but because of it.
The status of the Yen today (December 7, 2025 11:30am ET)
USD/JPY is trading around the mid‑155s today, with the yen modestly stronger than its late‑November lows but still historically weak, as markets price in a high probability of a Bank of Japan rate hike at the December 18–19 meeting. Japanese strategists and former officials increasingly frame a December move as “almost a done deal,” but emphasize that the medium‑term path after the first hike will determine how far the yen can actually recover.
What the market is doing
Spot USD/JPY is near 155.3–155.4, roughly flat on the day and slightly below last week’s high near 156, indicating consolidation rather than a fresh run‑up or capitulation rally in the yen.
Over the past month the yen has weakened about 1–1.5% against the dollar and is down roughly 3–4% over 12 months, leaving it near multi‑decade lows in real terms despite the recent bounce.
Short‑term pricing in FX and swaps markets implies a roughly 70–80% chance of a BOJ hike this month and a very high probability of at least one move by January, which has capped further USD/JPY upside for now.
Snapshot: current vs recent levels
What Japanese experts are saying
BOJ Governor Kazuo Ueda has openly said the board will “examine the pros and cons” of a rate hike at the December meeting and has warned that delaying hikes could force more abrupt tightening later, which Japanese bank strategists interpret as the strongest pre‑signal yet of an imminent move.
Tokyo‑based FX strategists at major banks (e.g., MUFG, OCBC) describe the current stance as “preparing” markets for a December or January hike and stress that a durable yen recovery will require not just one move, but clear forward guidance that further normalization is coming.
Domestic policy and political signals
Japanese government officials who previously resisted rapid normalization now indicate they would “go along” with a December hike, reducing political resistance and reinforcing expectations of policy convergence with the Fed in 2025.
At the same time, the finance ministry continues to flag “excessive” currency moves as problematic, keeping the threat of intervention in the background if USD/JPY were to lurch sharply higher again.
Key investor angle
The core debate among Japanese economists and sell‑side strategists is not whether the BOJ can deliver one hike, but whether it will be followed by a long pause, which would limit yen upside, or a gradual normalization path that could pull USD/JPY meaningfully lower over 2025.
Many Japanese houses frame fair‑value scenarios where, if BOJ gets to around 0.75% on the policy rate and the Fed is cutting, USD/JPY could drift back toward the high‑140s to low‑150s over a 12‑month horizon, but only if wage gains and inflation allow BOJ to keep tightening modestly.