Japan economy has always been a funny character. The land of the rising sun has experience some of the wildest stories in the economy of the world. Once the number 2 economy in the world, it is currently sitting at number 5 behind India, Germany, China and the US. But the biggest issue is that it was the number 2 just a couple of decades ago.
The country has had a decade of stagnation after the 1980s boom and the Yen has been somewhat stable for that decade. However as of late, the Yen has been starting to drop as well as the interest rate has starting to surge. The long period of Japanese stability has finally start shaking. This has started to produce a lot red lights around the world as much of the countries around the world are partially dependent on this low interest reate.
Carry trade is in a nutshell is an arbitration move where you get loans at a very small rate, and invest it where you get the most interest for them. Example, you are an investment fund, go to Japan and ask for 10 million yen (around 60k USD), and now you buy US Bonds at 4%. The interest on those 10 million yen would be around 0.1% (1000 yen or 62 USD) while the bond will pay you around 2,400 USD. That makes a profit of almost the whole amount of 2,338 USD.
Now imagine doing that with let say, Mexico that pays almost 10% or Turkey at 32%. And you see how a lot of speculation is being used on this. Move the yield in Japan a little bit, and the whole structure starts falling apart. How much money is allocated here? Well think of this 3 conditions:
Someone in Japan keeps buying the debt
Bank of Japan keeps the low interest rate
Japan keeps paying (or make everyone believe, it will keep paying)
Most of the most powerful economies are increasing their debt to a huge amount, Italy, the US and Japan lead this ranking but Japan is by far the winner with more than 200% of their gross domestic product. But the reality is that the whole world is carrying some kind of debt. The global average is dangerously approaching 100% of their GDP of humanity as a whole.
This is also causing a global rise of interest rate on investor money. This means if you want to invest, you will get better rates than ever before. However if you need money, it will cost you way more. Making the average creditor face higher rates and posibilites for a default.
Japan's prime minister, Sanae Takaichi, is viewed as a disciple of Shinzo Abe, a prime minister in the 2010s that introduced the "Abenomics" solution. Which involved even more spending through stimulus packages, monetary and structural reforms. The government has waste no time in spending large amounts of money. Approving the largest governmental budget of 122 trillion yen for 2026, specially on the military with 9 trillion yen.
These move come with a cost, which unfortunately is, high inflation for a country that is already heavily in debt. Shortage and inflation will hit increasingly the structure of japan as many prices might be frozen by the government (because their own spending), so the Bank of Japan is forced to increase the interest rate causing the cost of goods to rise and salaries as well. But this also affect the carry-trade as it withdraw the BoJ from buying debt, and with this it turns the other two around. And here is where these political turnarounds cause a turnaround in the global economy.
