The Japanese government’s $20 trillion carry trade has finally exploded
At the end of last year, when the latest cycle of the yen carry trade was still in its relatively early stages (when the dollar was as low as around 140 yen), there were media outlets explaining why the Japanese economy was effectively dead, and the only thing missing was an announcement of when it died.
The reason: the $20 trillion carry trade that the Japanese government had been involved in for the past 40 years was a giant time bomb that could not be defused, and once it exploded, the Bank of Japan was doomed. The collapse of these trades would require central banks to coordinate a rescue operation within days.
Not surprisingly, central banks around the world had no idea what was happening, and usually panicked afterwards and unleashed a historic wave of rate cuts within weeks to stabilize the situation.
