Japan Just Triggered a Global Market Unwind

I used Claude to map what breaks, what rotates, and how to position ↓

For two decades, there was a cheat code in global finance.

Borrow yen at zero. Convert to dollars. Buy U.S. Treasuries yielding 4-5%. Pocket the spread. Rinse. Repeat. Get rich.

This was the yen carry trade.

At its peak, exposure reached an estimated $1-2 trillion in direct positions, and multiples of that when you include derivatives and balance sheet effects. (Nobody knows the real number. That’s part of the problem.)

Hedge funds ran it. Pension funds ran it. Japanese life insurers ran it.

So consistent. So boring. So profitable.

Then the math broke.

The Problem

Japan kept rates at zero because their economy was stuck. Real estate bubble popped in the 1990s. Deflation set in. The Bank of Japan bought bonds to keep rates low.

For 30 years, it worked. Now it’s not.

Japanese 30-year yields just hit an all-time record: 3.43%. The 10-year is at 1.90%, highest since 2006. The BOJ meets December 19th, and markets price an 80% chance they hike the policy rate again.

Governor Ueda explicitly signaled it’s coming. That’s unusual. BOJ governors don’t telegraph moves. When they start talking, you listen.

In 2023, the spread was 4.75%. huge profit even after hedging costs. Today it’s around 2.2%. Razor-thin or negative after hedging. The “free money” is getting expensive.

When the spread compresses, the trade stops working. When the trade stops working, leveraged positions unwind. When trillions move, you feel it everywhere.

In August 2024, we got a preview.

BOJ hinted at tightening. Yen spiked. The Nikkei dropped 12% in one day, worst since 1987. S&P fell 3%. VIX spiked above 60. All because Japan raised rates by 0.25%. (Global finance is fun.)

That was a tremor. The question now: Is the earthquake coming?

How We Use AI to Map the Fallout

This is the kind of problem AI was built for.

Complex. Multi-layered. Too many variables for a human to hold in their head at once.

I gave Claude four questions. Each builds on the last.

1. What will the BOJ do? Policy is the trigger. Everything else follows.

2. How does this hit U.S. rates? Japan owns $1.2 trillion in Treasuries. When they stop buying, yields move in ways the Fed doesn’t control.

3. Which sectors get crushed? Some assets are directly funded by yen. Others are rate-sensitive. Others just sell because correlations spike during deleveraging.

4. What’s the rotation playbook? Capital doesn’t disappear. It moves.

The Prompt

I built a prompt that runs this entire analysis, BOJ scenarios, rate transmission, sector exposures, rotation playbook.

You can customize it for your coverage universe. Want to focus on biotech? CRE? Tech? Specify in the optional sector input.

Run it in Claude Opus 4.5 for best results. You even get it in a well-formatted Word doc.

What the Analysis Reveals

See the full output here:​ Yen_Carry_Trade_Unwind_Analysis_December_2025.pdf​

The base case is orderly. BOJ hikes the overnight policy rate to 0.75% (from 0.50%) with measured guidance. Carry trades unwind gradually. USD/JPY trades 150-156. This scenario is about 60% probability, and largely priced.

The hawkish tail is where it gets interesting. If the BOJ signals aggressive normalization toward a 1.25%+ policy rate, the yen spikes to 145. August 2024 becomes the template. This is about 25% probability, and it’s underpriced.

The asymmetry: upside from carry continuing is modest; downside from disorderly unwind is severe.

So what does this mean for your portfolio?

The transmission works in layers. First, Japanese institutions sell Treasuries as domestic yields become competitive. A 20% reduction could push 10-year yields up 35-50 basis points. That flows through to corporate borrowing costs.

Second-order effects hit rate-sensitive sectors. Commercial real estate faces a $1+ trillion refinancing wall at much higher rates. Mortgage REITs running 6-10x leverage see spreads compress and book values erode. Unprofitable tech gets re-rated as discount rates rise.

Third-order effects are the leverage cascade. When volatility spikes, correlations go to one. Momentum, crypto, high-beta equities; they sell together because margin calls don’t care about your thesis.

The Rotation Playbook

Move away from leverage and rate sensitivity. Move toward quality and stability.

Favor: Strong balance sheets, recurring revenue, pricing power.

Healthcare offers defensive growth with real cash generation. Names like UnitedHealth (UNH), Johnson & Johnson (JNJ), and Eli Lilly (LLY) don’t need capital markets to fund operations.

Consumer staples provide inelastic demand—people buy toothpaste regardless of Japanese monetary policy. Procter & Gamble (PG), Costco (COST), and Coca-Cola (KO) have pricing power and dividend stability.

Utilities like NextEra (NEE) offer regulated returns when everything else is volatile.

These aren’t exciting. That’s the point.

Avoid: Anything dependent on cheap capital or rolling debt at higher rates.

Mortgage REITs like Annaly (NLY) and AGNC are structurally short volatility, the wrong position for a carry unwind. Their 6-10x leverage amplifies losses when spreads compress. Office REITs like SL Green (SLG) and Vornado (VNO) face secular headwinds from remote work plus refinancing pressure at much higher rates.

Unprofitable tech like Snowflake (SNOW) sees multiple compression as discount rates rise; valuations built on cash flows a decade out get hammered hardest.

Bottom Line

The regime is changing.

Japan’s ultra-easy era, the hidden subsidy for global risk appetite, is ending. The base case is orderly, but priced. The hawkish tail is violent, and underpriced.

Rotate into defensive quality. Reduce leverage-dependent exposure. Maintain elevated cash through Q1.

The carry trade was the cheat code.

The cheat code is expiring.

Position accordingly.

Want to master AI for investing? Start here...

I created a free 5-day email course on prompting for finance.

It's free. No fluff. Just the exact frameworks I use.

Every day, you’ll get:

• A video breaking down the concept
• PDF handouts you can reference later
• My written take on how to actually use it

The world's top investors have gone through this course. It’s the fastest way to level up.

My FREE 5-Day Prompt Course for Finance The 5-Day Email Course That Teaches Investors How to Actually Use AI ​ Enroll For Free →