About the carry trade.... (Yen/Japan market domino)

... On Monday, the 5th of August 2024, the Japanese stock market came very close to a total implosion, and that would have dragged down with it many other major financial markets, especially the US one, as a result of the forced unwinding of hundreds of billions of USD in leverage linked to the JPY carry trade.
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pmbug said:

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Meanwhile the forex pair gets monkey hammered this morning. Maybe this is why...

Japanese yen surges as Ishiba wins leadership race to become next Japan prime minister

Traders were pricing in the possibility of Takaichi winning earlier before the run-off vote

www.forexlive.com

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Japan's Money Is Collapsing​

The US tried to save the yen without selling dollars. That lasted only until the intervention had to become serious.

Selling euros was the elegant version.

It allowed Washington to strengthen the yen without telling markets:

“America wants a weaker dollar.”

But that works only while intervention can stay small.

The carry system is too large for that.

Once USD/JPY pressure keeps building, defending the yen requires much bigger firepower. And eventually the US has to do what it initially tried to avoid:

sell dollars.

Policymakers are trying to keep the yen in an almost impossible zone:

weak enough to preserve the carry trade,
strong enough to prevent a Japanese currency crisis.

If the yen falls too fast, Japan imports inflation and loses control.

If the BOJ raises rates aggressively, the yen can rip higher and destroy leveraged carry positions globally.

If they intervene repeatedly, the size required keeps growing.

If they inject more liquidity, they preserve the leverage that created the vulnerability in the first place.

So the first move was about optics:

Sell EUR → buy JPY.
Protect the dollar narrative.

But once the pressure became too large:

USD itself had to become the ammunition.

That is why I think this is much bigger than an unusual FX intervention.

A reserve-currency system is healthy when its currency is the solution.
It becomes more fragile when policymakers are afraid of the consequences of selling their own currency, But eventually have no choice.

They can move the pressure around:

yen → euro → Treasuries → central-bank balance sheets.

They cannot eliminate it.

And if keeping the global carry structure alive requires progressively larger interventions, then what we are watching is not stability.

It is the system becoming increasingly expensive to stabilize.

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Yen Carry Trade Blow Up-Financial Equivalent of All-Out Nuclear War – Jim Rickards​