The impact of Japanese carry trade on the market

Due to the significant interest rate gap between Japan and the United States, carry trade has become an important strategy in the financial market. Six months ago, the interest rate range of the Bank of Japan was 0%-0.15%, while the US federal funds rate was 5.25%-5.5%, with a spread of nearly 5%. This means that capital can borrow at a near-zero interest rate in Japan, then transfer funds to the US market through a medium such as Bitcoin (BTC), and then purchase short-term US Treasury bonds (1 month, 3 months, 6 months) with an interest rate of around 5%-6%, thereby obtaining a 5% return on investment with almost no risk.

As the cornerstone of the global financial market and a safe-haven asset, U.S. Treasuries have a greater impact on the market. This arbitrage transaction not only makes money, but also stabilizes the U.S. financial market, such as the U.S. stock market. The complex impact mechanism of U.S. Treasuries themselves, including re-mortgage, interest rate inversion, fiscal expansion and other factors, will not be elaborated here.

In the Japanese carry trade, buying U.S. debt is the most reliable strategy, but there are many ways to operate capital, such as buying Japanese assets (such as Buffett's operation), or directly buying Bitcoin, U.S. stocks, etc. Although the specific data is difficult to verify, it is certain that these complex capital operations exist.

After understanding the basic arbitrage logic, we can compare the overall trend and time nodes of the yen, dollar, and BTC, and find that their pace is almost the same. Since March this year, the trend of the yen and BTC has almost overlapped, while the trend of the dollar is just the opposite. This shows that US dollar assets have begun to flow into the yen and BTC markets, and both have risen simultaneously, indicating the beginning of capital arbitrage.

Why start in March? Because starting from November 2023, the deflationary pressure in the United States will ease, and the Federal Reserve has repeatedly expressed confidence that inflation will fall back to 2%, and may start to cut interest rates before reaching 2%. Therefore, the market predicted in March that the Federal Reserve might cut interest rates, leading to an increase in asset prices. However, the Federal Reserve did not cut interest rates in March, and inflation did not return to a safe range. As a result, March became a key node for capital to turn to Japan for carry trades.

After that, the yen fell to a low of 160 in June and July, which was considered a red line for the Bank of Japan. Subsequently, the foreign exchange market fluctuated, and political events related to the attack on Trump caused the dollar and US bonds to fall, and the yen rebounded. In early August, Japan announced an interest rate hike and balance sheet reduction, which triggered capital flight. Japanese stocks, US stocks, and BTC all experienced flash crashes, which also indicated that Japan's carry trade was gradually ending, and capital began to look for new arbitrage locations.

At the Jackson Hole meeting in late August, Fed Chairman Powell sent out a signal of interest rate cuts, and everything seemed to be so logical. Recently, with the rebound of the US dollar, the revision of economic data, and the first visit of US National Security Advisor Sullivan to China, market expectations for future interest rate cuts have continued to heat up.

The above is an analysis of the trend chart of the US dollar and BTC. It can be found that in 2020, 2022, and 2024, the trends of the two are highly overlapped and show similar trends. Under normal circumstances, the two should show an inverse relationship (that is, one rises and the other falls). Whenever such an overlap occurs, the market usually ushered in a major turn, which represents the market's wait-and-see attitude towards the Fed's interest rate policy.

There are many logical chains that are connected and interconnected, which are very complex. The editing process is limited in thinking and can only briefly summarize these. The logical chain of the capital market is very complex, but the current situation shows that there may be a larger decline in September, or a slow decline, gradually withdrawing the market highs.