🚨 Japan is About to Nuke the Global Economy
A very dangerous news came out from Japan for Carry Traders: BoJ’s Yuto just revealed that Important off-the-record deals have been struck to secure Japan’s oil demand.
Markets immediately heard the implication: oil priced in yen. If that happens, the decades-old yen carry trade does not just wobble. It snaps.
Oil priced in yen would mean Japan (or its counterparties) settling at least some crude purchases in yen instead of dollars. Oil has been a dollar market for decades. Japan earns in yen, so it normally sells yen for dollars, then pays for barrels.
That constant yen-selling is one of the structural pressures that kept the currency weak and made cheap yen funding attractive. If a growing share of Japan’s oil bill is paid in yen, especially under bilateral political deals with the United States after the Hormuz disruption, two things change at once:
Japan needs fewer dollars for energy, and counterparties who accept yen have a reason to hold or recycle yen. That reduces a major source of yen selling.
That is what hit markets in August 2024. At the same time, Japanese yields are rising and yen is weakening after multiple interventions by U.S. Treasury and Fed. The U.S. 10-Year Yields have already broken 5.18% and not seeming to stop.
Scott Bessent even dumped Euros to save the yen, doubled U.S. Bond buybacks, warned the Fed to expand FIMA facility to Japan or watch the U.S. Treasuries collapse.
A move toward yen-denominated oil would reinforce the yen, raise the cost of funding the old carry, and accelerate the shift toward the reverse trade.
Higher yields in both countries already tighten financial conditions; a sudden yen squeeze on top of that would force leveraged positions to unwind into rising U.S. and Japanese bond yields at the same time.
This was exactly warned by the Famous City of London banker
@LordBelgrave at the start of the year.
The Yen-Crude Settlement was inevitable. Looks like it’s finally arriving.
