On My Radar: Japan, the Yen, and the Carry Trade — What’s Really Happening
January 30, 2026
By Steve Blumenthal
“There are decades where nothing happens; and there are weeks where decades happen.”
- Author Unknown
When a currency falls as interest rates rise, it’s usually a warning, not an opportunity.
Japanese Prime Minister Sanae Takaichi vowed to act against speculative currency moves after the yen fell suddenly against the dollar, signaling concern about disorderly fluctuations but stopping short of confirming direct intervention (she emphasized steps against “very abnormal market moves”). Source: Reuters
Under normal circumstances, rising Japanese bond yields would make Japanese bonds more attractive, the yen would strengthen, and the pressure on the yen would ease.
That’s not what’s happening.
Instead, the yen continues to weaken, even as Japanese yields rise (charts below). That tells us something important.
This week, Japanese officials struck a careful tone. Prime Minister Takaichi and Finance Ministry leaders warned they are watching “speculative moves” closely and stand ready to act if currency swings become disorderly. However, they stopped short of confirming intervention. The messaging is intentional: calm the market without forcing its hand.
At the same time, U.S. Treasury Secretary Scott Bessent reiterated America’s “strong dollar policy” and flatly denied any U.S. involvement in supporting the yen. No intervention. No coordination. At least publicly.
Put the pieces together, and the picture becomes clearer.
Japan is trying to contain stress without triggering a disorderly unwind. The U.S. wants lower yields and a lower dollar. Both sides are trying to avoid the one outcome that matters: a violent reversal of the global carry trade. A very real risk.
Markets aren’t reacting to growth; they’re reacting to confidence. Investors don’t yet believe Japan can normalize policy without destabilizing its bond market, and they’re not ready to abandon dollar assets while U.S. yields remain structurally higher. The administration wants yields to be lower. Japan needs them higher to attract capital and drive the yen higher.
For now, the unwind is being managed, not forced. Japan and the U.S. share the concern.
Why This Matters
The yen carry trade is likely one of the largest, most leveraged, and most opaque trades in the global financial system.
The yen carry trade sits at the center of global liquidity. A disorderly reversal would push yields higher, tighten financial conditions, and an unwinding would ripple negatively through equities, credit, and currencies.
So far, policymakers are threading the needle, allowing pressure to release slowly rather than all at once.
But these kinds of stress cracks don’t disappear. They build quietly - until something breaks. And breaks happen quickly.
Grab that coffee, and find your favorite chair. This is one of many systemic risks. John Mauldin wrote a piece about “Late Summer Sandpile” many years ago. It was about fragile states. It may be the best piece he’s ever written.
I’m sure you remember building sandpiles on the beach as a kid. There was a great study to understand what causes them to collapse. You could never know which last grain of sand added to the pile would cause it to crash. Leverage in the system, be it government debt, corporate debt, margin debt, or synthetic debt on bank balance sheets. The current sandpile is one of the largest in history.
Think of the yen carry trade as a large grain of sand. This week, it was placed on top of the sandpile. I try my best today to explain this in a way many can better understand.
Decades where nothing happens, and weeks where decades happen. Gold, silver, uranium, copper, commodities, China, Russia, Iran, Venezuela, Greenland, right/left, internal conflicts, external conflicts, us/them.
Grains of sand, suddenly whipped up into a dust storm.
On My Radar: Japan, the Yen, and the Carry Trade — What’s Really Happening
Personal Note: Dreams Don’t End
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The Yen, The Dollar, and The Carry Trade
How big is this yen carry trade?
There is no official number (that’s part of the risk), but various estimates put it anywhere from $1 trillion to over $4 trillion in effective exposure when you include hedge funds, macro funds, banks, insurance companies, corporate treasury hedging, synthetic currency (FX) exposure via derivatives, and structured products
The Bank for International Settlements (BIS) has repeatedly warned that yen-funded positions are deeply embedded in global leverage.
This isn’t one trade. The risk is systemically intertwined in all kinds of risk assets globally. It’s not just a yen problem; it is a global plumbing problem.
Normally, the higher Japanese Government Bond (JGBs) yields go, the higher the risk of collapse of the "carry trade" goes. The stress has been increasing with each tick higher in yields.
Following is a look at the 10-year Japanese Government bond yield. The yield has increased from 0.10% (basically free money) to 2.26% in the last three years.
Source: StockCharts.com, cmgprivatewealth.com
Think of the carry trade as a massive amount of leverage in the financial markets.
Investors were able to borrow yen at approximately 0% in 2023, convert them into dollars, and invest the money in U.S. Treasury notes at approximately 2%. They earn the spread. Leverage is used to enhance returns.
As yields rise in Japan, the attractiveness of the yen carry trade shrinks with the compressed spreads.
The unwinding of the trade would involve selling U.S. assets and dollars to convert the proceeds back into yen (sending the proceeds back to Japan to pay off the loan).
Under normal circumstances, when JGB yields rise, one would expect the yen to rise as the carry trade spread shrinks and Japanese bonds become more attractive. But that hasn’t been happening.
Thus, the concern that the overall size of the total debt is reaching a breaking point. End of long-term debt super cycle challenges.
While not the first shot across the bow, the behavior of the currencies and yields this week in Japan is another sign prompting panic on both sides of the Pacific to try to halt the yen’s decline.
One of Japan’s major issues is inflation, since it imports most of its energy needs (oil), and oil is priced in dollars. A lower yen means more yen is needed to buy the same amount of oil, which is very inflationary to the country's citizens.
The Japanese need a stronger yen and, ideally, a lower oil price per barrel. The U.S. administration appears to desire a lower dollar.
After sharp words from Japanese Prime Minister Sanae Takaichi and U.S. Treasury Secretary Scott Bessent, both the yen and the dollar are higher. I think it is temporary.
The root of the global mess lies in the size of outstanding debts. It’s become too big, as has the interest expense on the debts.
Let me try to summarize this in my bullet point form (my brain thinks this way. It helps me, and I hope it helps you too)
Why the Yen Is Falling Despite Higher Yields:
1. Japanese yields aren’t rising because Japan is strong. They’re rising because the BOJ is losing control of the bond market.
Investors aren’t saying, “Japan is attractive again.” They’re saying, “The BOJ may not be able to cap yields forever.”
That’s a confidence issue, not a growth signal.
2. The yield gap still massively favors the U.S.
Even with JGBs moving higher, there is still a *huge* carry differential.
Japan: ~2.25% and the U.S.: ~4.25%
For now, while Japan’s yields are rising, they’re not rising enough to offset: Higher U.S. yields, stronger U.S. growth, and better capital returns.
Bottom line: The math still favors staying in dollars.
3. The real issue: The currency risk is greater than the yield pickup. Here’s the key point I think most people miss:
Investors aren’t worried about yield anymore; they’re worried about currency instability.
If you’re a global investor and you believe:
The yen may weaken further
The Bank of Japan may be trapped
Japan may tolerate inflation to manage debt
Bottom line: Even rising yields won’t be enough to attract capital because currency losses can swamp yield gains. The risk is elevated, and leverage is sizable.
4. The carry trade hasn’t unwound; it’s being managed. This is critical because a disorderly unwind would:
Spike global yields, pressure U.S. Treasuries (higher yields on the long-end of the curve), and create volatility across all risk assets.
So instead, we’re getting the following from authorities:
Gradual repositioning, verbal intervention, and quiet coordination.
Bottom line:
When the yen falls while their yields rise, it is a warning signal that the market doesn’t trust Japan’s policy path. It is telling investors that higher yields aren't sustainable without currency pain.
For now, volatility is being suppressed. My major point is that this isn’t a normal rate move.
Japan is trying to normalize without breaking the system (needing a higher yen price), and
The U.S. is letting the dollar drift lower but not collapse.
Global markets are walking a tightrope between yield and stability. The systemic cancer in global markets is excessive Sovereign debt.
I believe that’s the story behind the headlines. They’re just trying to make sure it doesn’t happen all at once.
The unwind will eventually arrive. Watch the dollar, watch the yen, watch government bond yields.
Source: X, @RayDalio
Here is a look at the U.S. Dollar
The red arrow to the right points to the dollar reaction. Look at the spike lower and the new Weekly MACD sell signal. In trading today, the dollar is trying to hold on. Oh my.
Source: Stockcharts.com, CMG Investment Research
The views are Steve Blumenthal’s and subject to change. Not a recommendation to buy or sell any security. Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only. Current viewpoints are subject to change. Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only. See important CMG disclosures below.
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Trade Signals: January 29, 2026 Update
Trade Signals Sections:
Market Commentary
The Indicators Dashboard - Stocks, Investor Sentiment, Bonds, Commodities, Currencies, and Gold
Valuations and Subsequent 10-year Returns
Supporting Charts with Explanations
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Valuations and Subsequent 10-Year Returns - Where current valuations stand historically, and what they may mean in terms of forward returns.
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Personal Note: Dreams Don’t End - An Olympic Comeback Story
The Winter Olympics begin in less than a week. I hope you enjoy this short story.
“Comeback stories like this are rare.
When the Olympics arrive, the name Deanna Stellato-Dudek will be everywhere. She is 42 and heading to her first Olympic Games, more than 15 years after she walked away from competitive figure skating. She skated in the U.S. system until 2001, then stopped after chronic hip injuries made continuing untenable. She moved on. Became an aesthetician. Built a life that had nothing to do with training schedules or podiums.
Years later, at a work retreat, she was asked a question that was meant to be hypothetical: What would you do if you knew you wouldn’t? Her answer was blunt and immediate: She would win a gold medal. She could tell as soon as she said it that her unfinished business was calling.
By then, she had spent more time away from skating than she ever had in it. Still, the idea stuck. At 32, she returned to the ice, switched disciplines to pairs, and eventually became a Canadian citizen to compete with a new partner. There was no rush to meet a neat Olympic timeline. Beijing in 2022 came and went. She kept going anyway. “I’m already too old to be doing this,” she said at the time. “So I can be too old in six years, too.”
As a kid, the Olympics she imagined were Turin 2006. Competing in Italy after all, but 20 years later, struck her as a funny outcome. In 2024, she won a world title, becoming the oldest woman to do so. This season, she made the Canadian Olympic team and is a favorite to win gold in Milan.
The point isn’t where she finishes. It’s that she came back at all, without insisting the return look a certain way or happen on schedule. The years away weren’t wasted time. They were simply part of the story.
There’s something steadying about the idea that ambition doesn’t evaporate just because it’s gone dormant. Skill and experience don’t expire the moment a path bends. Some goals don’t demand urgency. They ask for patience, stubbornness, and a willingness to look slightly out of step with everyone else.
Let’s ask ourselves:
What ambition has lingered quietly, even after life seemed to move on from it?
What parts of a past identity still feel unfinished?
What would change if experience were treated as leverage rather than baggage?
Not all unfinished things are failures. Some are future chapters.”
I don’t read The Daily Coach everyday but I should. The above post moved me, and I hope you find it motivating, too. Source in the link.
From ice to snow and Lindsley Vonn.
Lindsey Vonn’s career is a study in resilience, and her latest chapter may be the most remarkable of all. After multiple knee surgeries, fractures, and years of physical setbacks that would have ended most careers, she somehow found her way back. Not only back to racing, but back to winning. This season, at 41 years old, with a partially replaced knee, she did the unthinkable: she won a World Cup downhill and earned her place on the U.S. Olympic team. Let that sink in.
This wasn’t nostalgia or a ceremonial return; this was elite, world-class performance against skiers half her age. It’s a reminder that greatness isn’t about avoiding adversity; it’s about answering it.
Ages 42 and 41. Grit, belief, discipline, and love to compete.
The 2026 Winter Olympics Opening Ceremony is scheduled for Friday, February 6, 2026, at San Siro Stadium in Milan, Italy - marking the official start of the Milano-Cortina Olympic Winter Games.
Can’t wait!
Sad news, this just in. Just before hitting the send button, news broke that Lindsey Vonn crashed in a training run today. She was able to stand and was then airlifted to a hospital by helicopter. It appears to be serious. Send some prayers to Lindsey. Ever forward, indeed!
Warm regards,
Steve
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Stephen B. Blumenthal
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Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management. Author of Forbes Book: On My Radar, Navigating Stock Market Cycles.
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