Japan just broke a 30-year trend, and global markets are on edge. The country’s borrowing rate has surged to 2.8%—spelling trouble for the once-lucrative “Yen Carry Trade” and rattling investors worldwide, investment banker Sarthak Ahuja warned in a LinkedIn post.
For decades, Japan’s ultra-low interest rates—hovering near 0%—made it the go-to funding source for global investors. Institutions borrowed yen cheaply and parked the capital in higher-yielding markets like the U.S. and India, where returns on bonds and equities ranged from 4% to 8%. After currency and transaction costs, the spread still meant easy profit.
This global arbitrage play, known as the Yen Carry Trade, is now crumbling.
On November 19, Japan’s borrowing rate jumped to 2.8%, its highest in 30 years. If it crosses 3%, Ahuja notes, Japan’s debt—already 2.5x its GDP—could become unmanageable. “This is catastrophic,” he wrote, as the profit margin on carry trades vanishes.
That’s triggered panic. Investors may now unwind overseas positions, especially in the U.S., to repay Japanese debt, increasing pressure on global equities.
But what’s causing Japan’s dramatic pivot? Inflation. For the first time in 25 years, Japan’s inflation rate crossed 2.5%, while real wages remain stagnant. The Bank of Japan is now forced to raise rates to cool demand and rein in prices.
Back in August 2024, even a modest rate hike to 0.25% triggered chaos: the Nikkei crashed 12% in a single day before stabilizing. This latest spike is far more dramatic.
“No risky bets at the moment. Protecting your capital should be a bigger motive right now than trying to exponentially grow it.”
