🚨 THE BIGGEST RISK TO THE GLOBAL ECONOMY IS NOT AI OR CHINA.

It starts in Tokyo.
Japan’s asset bubble collapsed in the early 1990s and the economy never fully recovered.
Interest rates were cut to zero. Then below zero. Long-term bond yields were effectively capped.
Domestic returns disappeared.
Japanese capital moved overseas.
Japan became the largest foreign holder of U.S. Treasuries, with over $1 trillion in exposure.
This gave rise to the Yen carry trade.
Borrow Yen at near-zero rates. Convert to dollars. Invest in higher-yielding global assets.
Scaled with leverage, this became a major source of global liquidity.
Estimates of total exposure range from $1 trillion to over $20 trillion.
That liquidity has supported equities, bonds, and real estate globally.
Now the dynamic is reversing.
Bank of Japan is raising rates.
Japanese yields are at multi-decade highs.
As rates rise, the Yen strengthens.
A stronger Yen increases the cost of servicing Yen-denominated debt.
This forces investors to unwind positions.
They sell global assets to buy back Yen.
Equities, bonds, and crypto all come under pressure.
A preview occurred in August 2024.
The Nikkei fell 12 percent in one day.
The S&P 500 dropped 4.2 percent.
Volatility spiked sharply.
Bitcoin declined 15 percent within hours.
This followed only a modest policy shift.
Institutions including the International Monetary Fund are monitoring the risk closely.
The timing is uncertain.
But the mechanism is clear.
If Japanese capital repatriates at scale, global liquidity contracts.