The Global Impact of Japan's Carry Trade on Economies

Japan's interest rate changes can trigger global market impacts, demonstrating the power of interconnected economies.

### The Power of the Japanese Carry Trade: A Global Economic Magic Trick
* 💰  The Japanese carry trade involves borrowing money at **low interest rates in Japan** and investing it in **higher-yielding assets elsewhere**, profiting from the **interest rate differential**.
* 🌍  This practice has been used globally for decades, with Japan's low interest rates creating opportunities for investors to **profit in countries with higher interest rates**.
* 📉  The recent market turbulence was triggered by the Bank of Japan's **unexpected interest rate hike**, causing panic among investors holding **carry trades**.
* 💸  The exact size of the carry trade is unknown, with estimates ranging from **hundreds of billions to trillions of dollars**.
* 📊  Economic indicators suggest a potential recession, with **rising unemployment** and **reduced consumer spending on luxury items**.
* 🏦  The Federal Reserve's upcoming decisions on interest rates are eagerly awaited, as they could signal the **direction of the US economy**.
* 📈  The speaker's personal investment strategy includes **dollar-cost averaging into Bitcoin, the S&P 500, and dividend ETFs**, while maintaining a **cash reserve for emergencies**.

so I want to show you how one country's currency was able to prop up the entire world using just a spoon. Sounds weird, but if I place the spoon on my hand like this and I start to slowly rub it, it's going to start to look like the spoon is bending. Watch. You see that tail end of it rising just by rubbing it? The metal is bending just like that with the power of my mind. It's fully bent. Okay, not really. That was just a magic trick. But within magic, there's this really interesting concept called misdirection. And the way misdirection works is not that different from macroeconomics. Because by creating one small hidden action in one place, I can cause a much bigger reaction in another. By lowering my fingers on one end of my hand, I can create the illusion of the metal bending on the other. But where you look is where all the action happens. And that's exactly how a tiny increase of just 0.25% of another country's central bank's interest rate, the Bank of Japan,

could cause the world to lose hundreds of billions of dollars. Imagine one small country, one currency, did all that. How? And this is where it gets really interesting because the mechanism that caused this to happen is something called the carry trade. Imagine borrowing a million dollars at 0% interest, which right now you can't do because interest rates are just too high, but it's possible to borrow from a country where interest rates are close to zero, like Japan, and then using that loan to invest in anything: stocks, real estate, treasury bonds, gold, Bitcoin, doesn't matter, as long as the return on investment is higher than the interest rate of your loan, and the currency that you borrowed is on the decline, then this could work until it doesn't. That's why the Japanese stock market dropped 12.4%, and that was the worst single-day decline since Black Monday of 1987. In the US, the stock market lost 3%, and the tech-heavy NASDAQ index fell 3.4%. Even the VIX, which is what people

like to use to measure people's fear went up to 65, and that's a level seen only two other times before the 2008 financial crisis and the pandemic. So, the markets got really scared, and they sold off. And, of course, right now, they've recovered, but I still have a lot of questions, like was that the end of it? Did we fully unwind, or is there more left to go? How big are these trades? How did Japan cause US Stocks to fall? And are we in a recession already? There's a lot of questions I don't know the answers to, but I want to try to understand. So, with that said, let's get into it. Hi, my name is Andrey J. Hope you're doing well. Welcome for the finance and stay for macroeconomic magic. Let me just show you a visual analogy of what I think is happening all around the world. As I'm building this little card castle, I just want you to imagine that each and every one of these pillars represents what allowed the Japanese carry trade to sort of exist like for

example Japan's low interest rate and the declining yen in the 1990s combined to make this little foundation that everything was built on top of because on top of that we built some interesting things like we added some investor confidence and then we added some global financial liquidity so as you'll see there we go and on top of that we added another foundation which represented all the countries in the world that wanted to get yields from their cheap loans so it looks like that creates a beautiful little pyramid but here's where it gets interesting because as things start to change like for example interest rates are no longer zero or negative we get this very interesting effect to happen then we start to remove other things like investor confidence for example kind of interesting and then of course we remove other things like global liquidity and we get something that makes no sense at all and that's a visual analogy of the stock market as it is today the only thing that's holding up this sculpture is the invisible force of central banking now in magic I like

to call this fake it until you make it, but in economics, it's called fake it until you break it, and break it we did because on August 5th, we broke it because that's when Japan introduced the force of gravity. My first question is, would you please subscribe 'cause that took me way too long to do, and the second question is, how did we get to a point in time where one country raising its interest by a tiny amount could affect someone on the other side of the world to wake up and say, What just happened to my stons? So let me give you a big picture historical context of how we actually got here, but first, a quick word from today's sponsor. So in today's digital age, ensuring the safety of my business data is more important than ever, especially since my team relies heavily on sharing and collaborating on content like my YouTube videos for my clients and my sponsors to review before they go live. So how do we ensure that our content stays safe? I've been using Dropbox for 10 years now and

I'm super excited to have them sponsor this part of my video with Dropbox. You get robust security tools designed to help protect and manage your content from inception to delivery. And besides securely storing my files, here are some other ways Dropbox keeps our content safe. The first is safeguarding sensitive files with passwords and expiration dates. By setting a password on my uploads before they go live, I can ensure sensitive information stays secure, minimizing risks of unauthorized exposure. And if I want an extra layer of security, I can set an expiration date as well. Also, have you ever deleted something super important, like the final iteration of your project? I know I have. With Dropbox's file recovery, you can get it back in a snap. Dropbox saves all your lost files for up to 6 months. All you have to do is go to the deleted files page, select the recoverable files or folders you'd like to bring back, then click restore. Just like that, it can pay for itself with this one feature alone. With Dropbox, there are no ads; they don't

profit off my data, and my content is secure. Unlike other products that are free, don't just take my word for it. Click the link below to see how Dropbox can empower you to stay proactive and secure. Thanks to Dropbox for sponsoring this segment of the video, and now let's get back to it. It turns out what made all of this possible was Japan trying to save itself. By the height of the 1980s, Japan became one of the most powerful countries in the world. Japan's stock market alone was estimated to be worth four times more than the entire value of US real estate. And times were so good, and Japan made so much money, it started buying huge portions of the United States. People in the US thought Japan would become the world's dominant superpower, but then it all reached a peak in 1989, and Japan collapsed. Now that's a completely separate video, not related to the carry trade, but it was Japan's rise and fall that created the opportunity for the carry trade because Japan started to experience deflation, and prices started

to fall so to save itself. Japan slashed its interest rate to nearly zero and then eventually to negative to encourage people to go out, borrow money, and spend it. But the Japanese people just experienced the worst economic crash of their lifetime. They didn't want to borrow money. Instead, the borrowers became speculators from other countries, and that's what created the carry trade that turned Japan into the biggest creditor nation in the world, where countries go to borrow cheap money. Let me just show you some examples of how Japan has propped up the entire world for decades now because countries with a high interest rate have also done this throughout history, like Australia, for example, in the 1990s. Australia, like the US today, had money pouring into itself from all over the world, which made the Australian dollar extremely strong, and Australia had a high interest rate. So what countries would do is they would borrow Japanese Yen, they would park that money into Australian treasury bonds, collect the high interest rate, pay off the loan, and they would pocket the difference. That was the infinite money.

glitch. It was a way to virtually risk-free make a return on their money, and this has been happening all around the world for decades with other countries and their currencies, including the Mexican peso, which spoiler alert didn't have a good ending, the Turkish lira, the Hungarian forint, the South African rand, the Indonesian rupiah, and the Russian ruble. And then 2008 happened, and the carry trade was reset, at least until 2013. And the carry trade was revived under Shinzo Abe's policies, which kept Japanese interest rates low and then eventually negative in 2016, while the United States and the rest of the world started to increase their interest rates. And that once again created this opportunity for the carry trade, and once again the cycle started to repeat. Money could once again be cheaply borrowed and invested into high-yield assets like the US Stock Market and treasury bond market for a guaranteed return. So, it works when things are working, but when things go bad, it can lead to a flash crash and

that's how you can get someone to wake up one week halfway on the other side of the world and wonder why their portfolio is crashing. All right, so if the carry trade has been around since the 1990s, the next question I had is could something trigger it to happen again, and how bad would it be? It turns out yes, it can, and here's how. All that happened was the Bank of Japan unexpectedly raised interest rates for the first time in 17 years, and just a small increase of 0.25% of the key interest rate was enough to scare investors and force their liquidations. When interest rates go from negative to positive, really bad things could happen to the market. In fact, the same thing happened to Europe in July of 2022. That's when the European Central Bank, the ECB, started to raise rates for the first time in 11 years, and watch what happens to the Vanguard International Market ETF ticker symbol VXUS right around that same time frame. The market

corrected 15% between the end of July to mid-October, and some of that can be attributed to the unwinding of their carry trade thanks to Europe ending its negative interest rate policy. So yes, all of this can happen at any time if Japan decides to raise their interest rate. Now unfortunately, because I'm not a smart economist, I couldn't figure out how bad a crash could get. But the truth is, no one really knows because we don't know the size of these carry trades around the world. But what we do know is they are really, really big. In fact, according to BIS, the Bank of International Settlements, which is sort of like a group of banks that report on information, they say that the loans outstanding from one country to another denominated in yen is valued at 41 trillion yen or a little over A4 trillion. But economists also say that's not an accurate measure of how big carry trades actually are, and that's because foreign exchange borrowing is not actually included or counted on a bank's

balance sheet. Instead, it's hidden within what's called foreign exchange swaps and the swap market, including the yen totals. Wait for it, 14.2 trillion US. That money is not counted as debt. It goes completely unrecorded because there is no spoon. That's why no one can agree on how big this thing really is. It could be in the hundreds of billions or in the trillions of dollars. Analysts at UBS, for example, say that it's 500 billion, so half of it just got unwound. But JP Morgan says it's $4 trillion, so we're nowhere near it being over. But no one knows. All we really know is that we got really lucky this time around because Japan backtracked and was like, We're not going to raise interest rates anymore. Just kidding. But no one really knows the full size of the mother of all carry trades and how bad this could really get. So all of this sort of leads me to ask the ultimate questions: Are we in a recession session, or are we going to be in one?

soon, and of course, the answer is no one knows for sure. So, I looked at a bunch of different things, and here are some of the trends that I've noticed. I might put you to sleep for the next minute or two, but I promise I'm going to tie it all together and show you what I think and how I'm investing through all of this. But the first thing that I noticed is that rich people are holding a lot of cash right now. Take Warren Buffett, for example. His company, Berkshire Hathaway's cash position relative to total assets, spiked to 25% in Q2 2024, the highest level in 24 years. He sold off so many stocks that his cash has now doubled in just 2 years. And it's not just investors raising cash. I've also noticed that luxury items are not selling as much, and the prices have significantly dropped, especially luxury cars, which I know is anecdotal and it's only a small part of the economy, but hear me out. If you've ever looked at auction sites like cars

and bids or bring a trailer. Luxury cars are not meeting their reserves, and in general, the used car market has significantly declined, and cars are usually the first to go. There's also rising unemployment. The latest jobs market report showed that unemployment is now at a three-year high, and this is a classic sign that the economy could be slowing down. It's happened a lot of times before; we get a recession, and a part of what leads to higher unemployment are small businesses. Right now, small businesses are going through a recession of their own because it's really hard for them to get a loan from the banks right now. The harder it is for them to get a loan, the less people they tend to hire, and the more they tend to let go, and that affects unemployment. That's exactly what we're seeing in this chart. Also, economists say that it takes, on average, roughly 10 quarters after the first rate increase to put economies into a recession, and right now we're on that 10th quarter, which means the likelihood

of us being in a recession is statistically higher, and that's why when you add everything up together, everyone is sort of waiting to see what the most important Bank of all will do, of course, the Federal Reserve, the central bank. And no one knows what they're going to do until September, but right now, the market is predicting a 74% chance that they're going to lower interest rates by at least a quarter percent in September. Now, this doesn't always happen, but when the FED starts to pivot and lower interest rates, that usually means the sign of a slowing economy and a potential recession ahead. That's not to say that we are in a recession or we're going to be in one, but those are just some of the things I've noticed. Now, if you made it this far into the video, here's what I'm personally doing. Please understand this is not supposed to be financial advice, and I don't want anyone to confuse the view counts of my video or the subscriber count of my channel as me having any knowledge about how to

actually invest. I share these numbers with you because I think transparency is really cool. That's what got me into saving and investing, and so I try to return the favor, and I hope that inspires you or informs you. But the way that I'm looking at everything is this year, we're in an election year, so all the numbers that I'm seeing reported by the government, I tend to think the real numbers are probably not as good as what I'm seeing. Maybe I'm wrong, but that's the way I look at it. Now, when I ask people what they're doing with their finances, they're saving. Are you investing? Are you just waiting to buy? A lot of times, I hear people say, I'm going to wait until interest rates come down, until house prices, car prices all come down, and I can finance and buy when it's cheaper. And that's fine, but I think what most people forget is that when interest rates come down, it's because the economy is slowing down, and when asset prices come down, it's not because

interest rates are cheaper. It's because people lose their incomes. Now, I hope that doesn't end up happening, but when it happens, people lose their purchasing power. That's why things go down. That's also why I've been building a cash position, just in case life throws a lemon in my face. I think it's really important to save at least 3 to 6 months' worth of an emergency fund, just in case. But when it comes to investing, I'm also dollar-cost averaging right now. For example, when the market flash crashed, I was buying a little bit of Bitcoin. Unfortunately, I missed it below $50,000, but that's okay because I'm putting in about $100 a day into Bitcoin, sometimes more, sometimes less, but that's about my pace. When it comes to the stock market, the S&P 500, I'm also dollar-cost averaging at the exact same rate of $100 a day, and that's into an ETF ticker symbol VTI, which is basically the broad stock market that's made up of thousands and thousands of different stocks. Now

I'm also reinvesting all my dividends, and right now I'm buying a dividend ETF ticker symbol JEQ or JEPQ to supercharge my dividends at the rate of $200 a day. My goal is to get to about $1,000 in that position, which I also realize all these numbers are completely unrelatable to most people. I don't want anyone to look at all this money that I'm investing in thinking, Wow, Andre is really confident and knows what he's doing. That is not the case, and to prove to you that I'm no genius stock picker, I will show you that so far my year-to-date returns are only 11% compared to VTI's 177%. So, if you want to make more money than me, just focus on the broader stock market. And then, of course, I'm also reinvesting all of my dividend income back into my portfolio, which right now is generating about $2,000 a month. But I will say I wish I

could just time travel back to my younger self and thank that kid for putting myself on this path today. I wish I could show him my portfolio right now and say, Look, you're still no genius, but even though you made only 11% this year, that's more than six figures. It's more than what you're making now, and it's more than what most people are making from their day job. And here you are, doing nothing, and these stocks and all the people on Wall Street are making you wealthier every single year just because you had the foresight to know that someday you will be at this point in your life. And all it took was just being consistent and not particularly smart, which I think is pretty cool. I'll leave a link down to the course below. Just kidding, I don't have any courses, but someday in the future, if there's any interest, I will definitely make one. And if you'd like me to do a more detailed breakdown of my portfolio, just let me know down in the comments below, and I'll

see what I can do, but in the meantime, I'd love to hear your thoughts about where you think the world is going and what you're doing about it. I hope you have a wonderful rest of your day. Smash the like button, subscribe if you haven't already, don't forget to grab your free stocks, links are down below. Go track them automatically with a spreadsheet link down below in my Patreon. I'd love to see you back here next week. I'll see you soon. Bye-bye.

The Japan Bubble: How One Country Is Holding Up The Entire World

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Andrei Jikh

The Impact of Japan's Currency on the Global Economy

Japan's low interest rates and declining yen have driven a global carry trade, where investors borrow at low rates to invest in higher-yielding assets.

This strategy has caused significant market reactions, including a 12.

4% drop in the Japanese stock market and a 3% loss in the US stock market.

The recent changes in interest rates and declining investor confidence have created uncertainty in the global financial system, leading to questions about the future stability of the markets.

Japan's Economic Impact and the Carry Trade

Japan's rise to power in the 1980s, with a booming stock market and significant investments in the US, led to its eventual collapse in 1989.

In response to deflation and a struggling economy, Japan slashed its interest rates to near zero, creating the carry trade as other countries borrowed cheap money.

This strategy of borrowing from Japan and investing in countries with high interest rates, like Australia, resulted in a global flow of money and strong currencies, with Japan becoming the world's biggest creditor nation.

The carry trade, a strategy of borrowing in low-interest currencies and investing in high-yield assets, has been a global phenomenon for decades, with notable examples including the Mexican peso and Turkish lira.

The strategy was reset in 2008 but revived under Japan's Shinzo Abe, leading to a repeat of the cycle until 2016.

A sudden increase in interest rates, like Japan's recent 0.

25% hike, can trigger market turmoil and investor liquidations, with the carry trade's global impact being significant and difficult to measure accurately.

The Hidden Impact of Foreign Exchange Swaps

2 trillion, are unrecorded and contribute to the uncertainty of global debt levels.

Analysts have differing estimates of the size of these swaps, with UBS estimating $500 billion and JP Morgan at $4 trillion.

Trends indicating a potential recession include wealthy individuals holding more cash, declining sales of luxury items, rising unemployment, and small businesses struggling to secure loans.

Navigating Economic Uncertainty and Personal Finance

The market predicts a 74% chance of the Federal Reserve lowering interest rates in September, a move that often signals a slowing economy and potential recession.

The speaker emphasizes the importance of transparency in sharing their financial journey and expresses skepticism about the government's reported numbers during an election year.

They are building a cash position for emergencies and are dollar-cost averaging by investing $100 a day into Bitcoin and the S&P 500 through an ETF (VTI).

Reinvesting Dividends and Building Wealth

The author is reinvesting dividends and buying a dividend ETF (JEQ or JEPQ) with a goal of $1,000, while generating $2,000 a month in dividend income.

Despite a year-to-date return of 11%, they emphasize the importance of consistency in building wealth.

The author reflects on their journey and offers to provide a detailed portfolio breakdown if there's interest.