Crypto has been pumping these days, and U.S. stocks have been riding high too. But do you know that behind all global capital markets, there’s a rope pulling the bull leash on all assets? And that rope is currently held tightly by the Japanese.
Today, we won’t talk about complicated economics. I’ll use high-school-level logic to lay this matter bare for you.
1. How does the world’s biggest “cash withdrawal machine” work?
Imagine you discover an ultra-cheap way to borrow money: the interest is only 1%. You borrow 1 million, then turn around and buy U.S. tech stocks with a 10% annualized return—or buy crypto. In the middle, you basically make a free 9%.
This is the “yen carry trade” that global hedge funds and institutions have been playing for decades. Over the past decades, Japan’s interest rates were extremely low—even negative. So everyone went on a borrowing spree—borrowing yen, converting to US dollars, and buying assets everywhere around the world. The cross-border borrowed money totaled as much as 360 trillion yen. The global stock market and the crypto boom—much of the fuel behind it—was these borrowed “cheap funds.”
2. Why did the whole market get spooked when the Bank of Japan raised rates?
On September 18, the Bank of Japan finally raised rates, bringing the rate to 1.25%, the highest level in 31 years.
But strangely, that day the yen didn’t rise—it kept falling instead. The USD/JPY exchange rate shot up to 158.
Because the market feels: this medicine isn’t strong enough! But either way, the Bank of Japan’s “water faucet” has already started tightening.
3. What does this have to do with the crypto market? A lot!
Think about it: if the cost of borrowing yen rises from 1% to 2%, and even the yen starts appreciating, then the lending institution faces a double blow:
The interest on the borrowed money becomes more expensive (Bank of Japan rate hikes).
When you convert back to yen to repay, you need more US dollars (yen appreciation).
The profits are gone—worse than that, you’re actually losing money. So what do you do? You can only sell the assets you hold, convert them into yen, and repay the borrowed money immediately. This move is called “carry trade unwinding.”
At this point, what assets will institutions sell to get cash the easiest? The assets with the best liquidity. US stocks and Bitcoin are often the first “cash-out machines” to get smashed in a sell-off.
4. The transmission path to the crypto market
Once large-scale unwinding happens, you’ll see in the crypto market: the big pie and Ethereum plunge with no warning, long positions get liquidated, and altcoins are cut in half immediately.
The massive crash on August 5 last year was a classic case triggered by yen carry trade unwinding. Back then, the big pie fell 15% in a single day; altcoins were cut straight in half. Behind it was yen carry-trade capital withdrawing chaotically.
5. What signals should we be watching?
At this stage, the Bank of Japan is really riding a tiger: if it raises rates too fast, its own economy can’t take it, and it will also trigger global carry-trade unwinding. If it doesn’t raise rates, the yen will depreciate and inflation won’t be contained.
Next, just watch two things:
First, the USD/JPY exchange rate (once the yen rapidly appreciates, the big pie is likely to fall).
Second, the Bank of Japan governor’s “talk” (hawkish tone—markets will shake three times).
In summary:
Today’s global liquidity is like a tightly stretched rubber band. The Bank of Japan is gradually pulling it back. The more aggressively the crypto market is rising, the more you need to be wary of the shock when this rubber band suddenly snaps. The fundamentals of the big pie are solid, but you can’t pretend you don’t see this global leverage’s fuse.
#Creator Academy #Macro Liquidity #Yen Rate Hikes