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It's official. The United States, along with Japan and Korea, have just agreed on measures to save the Japanese yen. And that makes a lot of people wonder: Kevin, is this going to lead to another Japanese carry-trading crisis , where the NASDAQ falls 10% in a matter of days and the volatility index skyrockets?
Look at this. This is a chart of the VIX, the CBOE market volatility index . And you see that the volatility on Liberation Day was the second highest we've seen as markets sold off rapidly. What was worse? The volatility we saw during the Japanese carry trade crisis, the surprise rate hike by the Bank of Japan on July 31, 2024, and the subsequent August market crash, which came after July was already quite weak.
So it's natural when people hear "carry trade" or "wait, intervention, the yen is acting strange, it's bad for the markets," they message me, " Kevin, please tell me about this." In this video we'll figure out what exactly is happening. Now that we have some idea of why this is a concern for people, we need to know what exactly happened.
The US government has opened a limit of $60 billion per day, which is renewable. You cannot use this entire amount every day. It's like borrowing overnight, paying back the debt the next morning, and then borrowing again. But in any case, the US government created a $60 billion per day facility so that Japan could actually borrow against the US Treasury bonds it owns without having to sell them.
And this gives an understanding of why the United States is intervening in this situation at all. Because if Japan said, "[ __ ], we need to stabilize our currency." "Let's dump the pile of US Treasury bonds that we have sitting at the Federal Reserve," in this case the Bank of Japan. "Well, let's get rid of them." What will happen then?
You will push interest rates in the United States up, increasing the cost of borrowing for you, me, other companies, and ultimately creating additional inflationary pressures, which is the opposite of what the Fed, the U.S. government, and the Bank of Japan want. They don't want any additional inflationary pressure.
Therefore, the US government, together with South Korea, is trying to verbally push Japan by ensuring the stabilization of their currency. One way to do this is this government mechanism so that Japan doesn't have to sell off its Treasury bonds. Another way they do this is through so- called “verbal intervention,” where Trump, Bessant, the Bank of Japan, and other officials virtually shout that they are going to support the Japanese yen.
The Japanese yen is too cheap. She is underrated. They're actually trying to get people to stop playing the yen down, because when you go short, the value of the yen goes down because more people are selling it, right? And that's exactly what they're trying to avoid . Why are they trying to avoid this?
Because the more the yen weakens, the more Japan has to pay for imports, and this increases inflation in the country. So just remember: when their currency loses value, inflation rises, which actually increases the risk of another shock to the market. Some of what I've said may seem complicated, or already is .
So we'll simplify it with specific strategies—what I think is worth paying attention to in order to understand: are we in for another carry trade selloff? Of course, many people just open the schedule. They look at: how many yen can one US dollar buy? And the higher this trend is, the stronger the dollar is against the yen, and the yen is essentially getting weaker, right?
This is an inverse graph. But here you can see that the yen has strengthened. This was caused by an intervention announced after the market closed on Friday, and there were many headlines about it. I know a lot of people use the Alphawire app, which is completely free to use. You can download the Meet Kevin app from the Apple App Store or Google Play to see news the second it breaks.
For example, 2-3 minutes before CNBC announced it, we instantly received ISM manufacturing employment data, which turned out to be better than expected. If you want to use this, you can literally do it for free. Just download the Meet Kevin app from the Apple or Android store to your phone, and after registering, you can go to app.mmeke.com and use the desktop version, which is quite convenient.
However, governments are really trying to stabilize the yen, because if the yen stabilizes, inflation in Japan stabilizes, and if inflation in Japan stabilizes, they might not have to raise rates as much, and then there would n't be as much pressure on U.S. Treasuries. The US Treasury bond market is already under enough pressure.
We already have effectively two rate hikes in the Treasury bond market. Well, we see some weak short-term relief because there is hope that Iran and Trump are negotiating again together with Qatar and our allies in the Middle East. The stakes are much higher than they were before. So, let's try to understand everything that was said and why it's important.
Why this is important is shown in this great simplified board. When the Japanese yen loses value, Japanese inflation increases as it becomes more expensive for them to import goods . Then Japan may have to sell US Treasury bonds to stabilize its currency. This raises the stakes in the United States, which is why the United States wants to help with coordination here.
And Korea wants this too. Korea is here more as an assistant or companion. They are not investing money in solving this problem yet, although they are selling a few dollars. This is important to them because if the Japanese yen falls in value, the Korean yen looks more expensive, which suddenly makes Toyotas cheaper than Hyundais and Sonys cheaper than Samsungs.
You see, this is why Korea is concerned. That's why the United States is concerned. And why does this worry financial markets? Financial markets are worried because if the yen continues to fall, there is a risk— since the Bank of Japan has a mandate to contain inflation —that inflation will continue to rise, and then the Bank of Japan may have to resort to a shock or sudden, unexpected rate hike, which is what we saw in 2024.
So, on July 31, 2024, markets did not expect the Bank of Japan to raise rates, and it did. This was a shock. Markets don't like to be caught off guard. They like it when information is presented in moderation, even if it is bad. This is a bit like the discussion we're seeing between Powell and Kevin Warsh.
Kevin Warsh says, "I don't need to talk to you ." Jerome Powell says, “No, no, no. Forecasting guidance. We will give it to you in doses, understand? We will give you the medicine slowly so you don't choke." Okay, different strategies. The point is that we saw what a sudden collapse can do. A sharp price spike sends markets into a spiral, and then companies go bankrupt , which, paradoxically, ultimately hurts capitalism because you think, "Well, capitalism is supposed to mean no intervention." But when the government sometimes doesn't intervene, companies collapse extremely quickly.
A lot of people suddenly lose their jobs, and you get crises on the scale of the global financial crisis that make people demand socialism or, you know, something worse that degenerates into communism, and then capitalism dies anyway, right? So it's kind of like this : while the intervention looks like it's interfering with the workings of markets, the rationale for that intervention is an attempt to prevent a crisis that will eventually lead to socialism.
So it's never either or, right ? It's always a balancing act. That's why you're seeing this intervention from a conservative president. You might see less of this. So what does all this mean in the long term? Well, first, you want to ask yourself: how helpful has the intervention been in the past? Not very useful.
By the way, remember the chart of the Japanese yen over time that I showed you ? It has been weakening in recent years. So you can see it right here, which you can also see on the Me Kevin app. This line is going up, and the Japanese yen is getting weaker and weaker , because the dollar is getting stronger.
This is a basic trend. This doesn't work. From September to October 2022, Japan conducted an intervention worth about $58.7 billion , which was leveled off in a few weeks. The bearish speculators returned immediately. In April- May 2024, the $62 billion intervention also quickly lost its effect. The bearish speculators returned immediately.
July 2024, the $22 billion intervention also came to naught quite quickly . Although we had a crisis there due to the carry trade on July 31. Then July- August, that is, now, in 2026, an intervention of $87 billion in 2 days. In fact, there is little reason to expect that things will be different this time .
People say, " Oh, this time it's different, because we now have a permanent mechanism for Japan, a support mechanism." Oh, we just adore these mechanisms. We have a stated goal of the United States, Trump, Bessant, Korea, and Japan to intervene and stop the yen depreciation game. The US and Korea are also involved, which is an interesting coordination that we have n't really seen since the 80s.
However, over time, we have found that the yen eventually depreciates and loses its value. And this gives us a realistic forecast. There are three ways to look at the Japanese carry trade. And I think it's really worth writing down. This is something you need to learn. So, let's wipe this board clean.
We will write down three scenarios. We will write down a low-risk scenario, a medium-risk scenario, and then a highest-risk scenario. Of course, as a long-term investor or even a short-term trader, you should be most concerned about the high- risk scenario, and you should be prepared for it. So what does low risk look like?
Low risk is when you type USD to JPY into Google and the rate fluctuates around 155–157. It doesn't break the 160 mark. Quite stable. The Bank of Japan is not raising rates, and everything is fine. People stop talking about carry trade. No problems . So low risk is essentially buying on a dip. This was noted in our alpha report this morning .
In fact, I said, "Hey, right at the market open there might be a little bit of a pullback because of the Japanese carry trade issues because, you know, people have to rebalance or something." "But it's an opportunity to buy on the dip because I don't think it's going to last long. " This is not such a big problem.
This was in our alpha report this morning and live for course participants this morning. This is not advertising. This is just so you know that I myself believe what I say: what we are seeing now is not something serious. I'm just sharing this with you for free. I'm not trying to force anything on you .
Okay. Low. Okay. The Bank of Japan is holding. The Bank of Japan is holding. And then we'll do JPY. Stable. Okay. This is your lowest risk. Now, what is average risk? Let's take another marker. I don't like this one. Medium risk. The Bank of Japan is eventually forced to raise rates. Okay, so the Bank of Japan is raising rates.
This is a medium risk because we already expect the Bank of Japan to raise rates with a probability of about 48% by 25 basis points. So it would n't be a big surprise if they did. The medium risk would also, and this is an interesting point, include a Fed rate hike. If the Fed and the Bank of Japan both raise rates, then the difference between the two currencies remains the same, right?
Because the yield, the difference in yield, is what makes the Japanese carry trade attractive. Simple math. These are not actual numbers. If you could borrow in Japan at 2%, why borrow in the United States at 4%. You could borrow there and invest here. This is mostly done by American hedge funds, right?
So, people hear "Japanese carry trade" and forget that it is actually American institutions that are taking advantage of this difference. If both rates increase by 25 basis points, the spread will not narrow. It doesn't really mean anything. So the Fed could raise the rate, and the Bank of Japan could raise it, or neither of them would raise it, and you 're in the medium risk zone.
So, both increase or not—it's an average risk, and the more predicted it is, the better. Again, this whole story with forecasting and predictive indicators. OK. And here is your highest risk, or, let's say , worst-case scenario. OK. The worst case scenario is a Fed pause. The yen is crossing the 160 mark again, and the Bank of Japan is signaling that things are getting tough, and I'll just write it down—more rate hikes.
That's it. It came out a little sloppy there. I want you to think about this. Low risk: Bank of Japan keeps rates on hold. The yen remains stable. We stop talking about it . Nothing special. We buy on the decline. Everyone doesn't care . Medium risk: both raise or both don't raise rates. The situation between them remains almost unchanged.
Everything meets expectations. Everyone doesn't care . The worst-case scenario is a surprise hit from the Bank of Japan while the Fed remains on hold, so let's say we round up and take 4%. So, 4% remains 4%. But yen rates are rising. Now you have a contraction happening, and if it happens unexpectedly, and the Bank of Japan says, "Hey, we're going to do more than one hike.
We're going to do multiple hikes, while the Fed stays put and Japan goes up." "And they predict even more." This comes as a shock , and inflation in Japan is high, while inflation in the US is lower than expected. It all depends on expectations. Then you may see another very strong sell-off in the Japanese carry trade.
You get a shock, the VIX spikes, Japanese stocks fall, earnings suffer, tech assets are liquidated, US Treasury yields soar —essentially a repeat of August 2024 . So I want to be very clear on this issue. It takes a perfect storm for this to happen. Inflation in the US is lower, inflation in Japan is higher.
Japan raises more, the US raises less. These differentials, which become a shock to the market, are what create the sell-off in the Japanese carry trade. So actually this aid is being provided to try to prevent that. I am not a big fan of market intervention. I think the best thing is, you know, to continue to inform about what's really happening and what the intentions are.
And as long as you deliver bad news gradually, not all at once, people tend to get over it. They are, so to speak, able to swallow this pill. Okay, let's try to sum this up. In short, as we said in the alpha report this morning, it's not a big problem. Right now it's basically an opportunity to buy on a dip.
And I think the downturn is mostly over as of this morning . It was a very short decline, about 10 minutes . While NASDAQ 100 stocks are still lower than they were the last few weeks, we are still waiting for that software market bottom in Q3-4, which is what this channel has been talking about : we thought the NASDAQ 100 could be under pressure after the " big takeover" after the SpaceX IPO, as SpaceX is now in the NASDAQ 100, and the software market could bottom in Q3-4.
Microsoft agrees to some extent , as do stocks like Service Now and Salesforce. More on this later. We'll see. I mean, Palantir's reporting is today, so maybe they'll screw things up, but we'll see. So, let 's do a quick comparison between a beginner and a professional. A beginner hears about the Japanese "carry trade" and immediately remembers the stock market crash of August 2024.
Minus 10% in a few days. The professional says: " You don't need to worry about it ." It would take a perfect storm of shocks to repeat August 2024. ” Bottom line: the Bank of Japan needs to raise rates when it is least expected. The Fed needs to take a pause when it was least expected. We need more inflation in Japan than expected and less inflation in the US than expected.
And then more unpredictable interventions by the Bank of Japan are needed, such as signals of multiple rate hikes. If all of this happens , yes, the market could collapse again. Is this likely? Most likely, no. But that's exactly what happened in August 2024, thanks to the Bank of Japan's surprise rate hike on July 31 .
This is why surprises don't benefit markets. So here are the things. Thank you very much for watching. See you all alked happy to hear your opinion.
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