China’s Next Lever vs Japan: The Bankers’ Delight Yen Carry Trade
Beijing has already cancelled flights, visas and scallop orders to punish Japan for raising Taiwan. The next lever is quieter, systemic embedded inside the balance sheets of the entire Western financial stack.
For twenty years: borrow yen at 0%, short it, buy higher-yielding assets: Treasuries, CLOs, mortgages. BOJ printed. Wall Street deployed. The position is now multi-trillion, hyper-leveraged, and fragile.
Why the Yen Carry Trade Matters
Size: 5–15 trillion USD equivalent embedded in global credit markets.
Trigger: A 2% weekly yen spike forces automated unwinds. China can create the spark by reducing FX quotas.
Timing: BOJ hiking + Fed easing = collapsing spread → systemic vulnerability.
Fallout
Yen spikes → UST yields jump → U.S. 30-yr mortgage +30 bp. Equity vol detonates. Pension funds hit margin calls. Japan forced to intervene or walk back Taiwan statements. U.S. trapped between markets and alliance commitments.
