Chief Investment Strategist
Summary: A Trump-driven Fed pivot crashes the carry trade, hurling USD/JPY to 100 and unleashing Japan’s wildest asset bubble since the 1980s.
Markets are stunned as the yen rockets from 150 to 100 per dollar, its sharpest appreciation in decades. The move isn’t driven by aggressive tightening in Tokyo, rather the BOJ stays neutral, focused on stability. Instead, the shock comes from Washington. With Powell’s term ending and a new Fed chair appointed by the Trump administration, the Federal Reserve pivots to rapid rate cuts — not just to support a slowing U.S. economy, but to deliver what Trump has long demanded. The yield gap with Japan narrows sharply, unwinding the carry trade that thrived on cheap yen funding.
For years, global investors borrowed in yen to chase returns in U.S. credit, emerging-market debt, and even AI growth stocks. When volatility surges and yields collapse, those positions unwind violently. Hedge funds and corporates rush to close shorts, triggering a massive yen squeeze. The move accelerates as stop-losses trip and margin calls cascade through global markets.
Japanese companies respond defensively. Even as exports soften under a stronger currency, firms repatriate profits and reduce dollar holdings to protect margins. Falling energy prices and nuclear restarts shrink the import bill, keeping Japan’s current-account surplus strong and adding genuine flow support.
A firmer yen cools imported inflation, driving headline CPI back toward 1% and stabilising real incomes. Growth slows modestly as exporters adjust, but domestic liquidity swells as cash floods home. The combination of cheap credit, strong household balance sheets, and surging asset inflows raises talk of a new asset-price bubble in Tokyo’s property and equity markets.
By year-end, analysts draw parallels to the 1985 Plaza Accord, when coordinated policy pushed the dollar lower and the yen higher. This time, the shift is market-driven, fuelled by carry unwinds, repatriation, and a weaker U.S. rate backdrop.
Potential market impact: Global risk assets retreat, EM FX slumps, and Japanese exporters lag, while domestic banks, insurers, and households benefit from stronger purchasing power and rising local asset prices.
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