Japan Just Raised Rates Again—And a Slow-Motion Crisis Has Begun

Japan’s Era of Free Money Is Finally Over

Yesterday, the Bank of Japan (BOJ) raised its benchmark interest rate to 0.75%. That’s the highest level in roughly three decades.

Markets had kind of expected this.

And yet, Japanese government bond yields climbed to around 2%, near their highest levels in 18 years. Meanwhile, emerging market currencies that had been popular targets for the yen carry trade (more on how this works below) weakened across the board—the Mexican peso, Brazilian real, and Turkish lira all slipped.

But the BOJ didn’t just raise rates—they made it crystal clear more hikes are coming. Governor Kazuo Ueda pointed to a “moderately recovering economy,” tight labor markets, and rising inflation. Translation: we’re in a tightening cycle now, not making a one-off adjustment.

And that changes everything.

You might remember August 5th, 2024. Japan’s Nikkei plunged 12.4% in a single day—the worst drop since Black Monday in 1987. The selloff spread globally, wiping out over $5 trillion in market value as stocks, bonds, commodities, and crypto all got hammered.

That crash was triggered by the BOJ raising rates to just 0.25%. After nearly two decades of keeping rates near zero, they finally blinked. The yen surged 10% in a matter of weeks, and positions funded with cheap yen were suddenly underwater. That triggered a violent unwinding—and a cascading selloff across global assets.

Now rates are 0.75%. And climbing.

The difference is, this time it won’t be a one-day crash. It’ll be a slow-motion train wreck—a gradual unwind of one of the largest financial distortions in modern history.

The era of free Japanese money is finally over. And the consequences are just beginning to show up.

The Global Money Glitch

I know, I know. Not everything has taken a dive. Bitcoin is up. Some tech stocks are holding steady. And that’s led some people to say, “See? This is already priced in.”

But people don’t understand this. The unwind of the carry trade is not something that gets priced in. It’s a process.

In the coming weeks or months, investors will come to realize that assets bought with borrowed yen are no longer generating enough return to cover the interest on that funding. Once that becomes clear, positions have to be reduced. Assets have to be sold.

To understand what’s happening, you need to understand the yen carry trade—the financial strategy that’s funded trillions in global speculation for nearly three decades.

For most of that time, Japan kept interest rates pinned near zero. This created an irresistible opportunity: borrow yen for almost nothing, convert to dollars or other currencies, and invest in anything yielding more than zero—which was pretty much everything.

Here’s how the trade works.

In a yen carry trade, you borrow Japanese yen at rock-bottom interest rates. Then you convert that cheap money into dollars and invest it into higher-yielding assets abroad—U.S. Treasury bonds, stocks, real estate, crypto, emerging market debt, you name it.

The mechanics are simple. Imagine you’re a trader who borrows 10 million yen at near-zero interest rates when the exchange rate is 100 yen to the dollar. That gives you $100,000 to play with. You dump this money into U.S. Treasury bonds yielding 4%. After a year, you’ve pocketed $4,000 in interest.

And it gets even better. If the yen has weakened to 105 yen per dollar over that year, you only need $95,238 to repay your loan. You’ve profited not just from the interest rate difference, but also from the currency move.

It’s essentially free money.

And for nearly 30 years, both conditions held. Japan kept rates pinned near zero while other countries offered yields of 2%, 3%, 4% or more. Traders, hedge funds, and institutions milked this cash cow relentlessly. Bloomberg estimated yen carry trades reached hundreds of billions globally at their peak. More realistic estimates, once you include derivatives and indirect exposure, put the figure into the trillions.

Some people called it “the global money glitch.”

But there’s a catch—a predictable one if you think about it for more than five seconds.

This strategy only works as long as Japanese interest rates stay low and the yen remains weak. If either condition reverses, the math breaks. And when the math breaks on trillions in leveraged positions, things get ugly fast.

The Domino Effect

Here’s where it gets interesting: as the BOJ raises rates, the Fed is moving in the opposite direction—cutting rates three times in 2025 alone.

Think about what that means. The interest rate differential that made the carry trade so attractive—borrow at 0% in Japan, earn 4%+ in the U.S.—is shrinking fast. Japan is tightening while America is easing. The gap that funded decades of speculation is closing.

As I mentioned earlier, Japanese government bond yields are near 18-year highs, at around 2%. On an absolute basis, that still looks low compared with U.S. yields. But the comparison that matters isn’t Japan versus the U.S.—it’s today versus the last two decades. For Japanese investors, yields at home are finally starting to look competitive again.

Keep in mind: Japan isn’t just any country. It’s one of the biggest creditors on Earth.

Japan holds roughly $3.7 trillion in net foreign assets and is America’s single largest foreign creditor (with more than $1.2 trillion in U.S. Treasuries as of 2025).

And it’s not just bonds. Japanese institutions have billions tied up in U.S. stocks, corporate debt, and real estate.

Here’s what many people don’t understand. Japan doesn’t have to directly dump U.S. assets for this to hurt American markets. Given how massive a global creditor Japan is, even repatriation from other markets can send shockwaves across all asset classes. It’s a domino effect. Capital flowing back to Japan from emerging markets tightens global liquidity—and that tightening eventually hits Wall Street just as hard as if Treasuries had been sold outright.

Note: As I explained in a recent essay, Japan isn't choosing this path—they're being forced into it. Inflation is running high, the yen has been weak, and with the world's oldest population depending on imports for 60% of its food and nearly all its energy, keeping rates at zero risks a currency collapse that would make basic necessities unaffordable.

So what’s at risk?

A lot. Emerging market bonds, tech stocks, crypto, leveraged equity positions—anything that’s been funded with cheap yen. And as I said earlier, these aren’t going to crash in a single day. Funding costs rise gradually. Leverage becomes uncomfortable. Positions get unwound piece by piece as the math stops making sense. They’re going to grind lower as the carry trade quietly unwinds over months, not hours.

This time is different. This time, it’s a gradual, relentless bleed.

Regards,

Lau Vegys

P.S. When overleveraged economies start cracking and central banks run out of options, hard assets become the only real shelter. That’s exactly why Doug Casey has always recommended holding precious metals in your portfolio—and why a significant portion of our Crisis Investing portfolio focuses on carefully selected gold and silver mining stocks, many of which Doug himself owns.