THE END OF FREE MONEY IN JAPAN: 2 Years Income Breaks 1% for the First Time Since 2008 – The Carry Trade is under attack!

[Igor Pereira]

A seismic event occurred in the Japanese securities market, often ignored, but vital to global liquidity. The 2 year old Japanese government (JGBs) bonds yields jumped above 1% for the first time since 2008.

By Igor Pereira, Financial Market Analyst, Junior Member WallStreet NYSE

This movement marks the definitive end of the "free money" era in Japan. The Bank of Japan (BoJ) is being forced to normalize its policy, and the repercussions will be felt in all risk markets in the world.

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1. The Historical Chart: Breaking Decade Resistance

The graph is shocking for those who follow the market for a long time:

• The ZIRP era: For more than a decade, short-term incomes in Japan were held close to zero or negative (the red area on the chart).

• The Breakup: Now we see one vertical rise (the green area on the right), breaking the psychological barrier of 1.0%.

My Analysis (Igor Pereira): This signals that the market expects aggressive interest increases from BoJ to fight inflation and defend the yen. The low-income "anchore" that maintained the suppressed overall incomes was lifted.

2. The Threat of Carry Trade and Treasures

Why does it matter to you?

1. Carry Trade's death: Yen Carry Trade (zero-cost yen loan to invest in high-income assets in the US/Europe) was one of the largest sources of liquidity for global markets. With Japanese interest rising, this trade becomes expensive and dangerous. The dismantling of these positions can cause Forced sales in global stocks and bonds.

2. Less Demand by Treasures: Japanese investors are the largest foreign debt holders in the US. If they can now get 1% or more at home without exchange risk, demand for American Treasures will decrease by pressing US income upwards.

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Conclusion of Igor Pereira: View Volatility

The monetary tightening in Japan, coinciding with Fed uncertainty in the US, draws liquidity from the global system just when it needs it most.

• Dollar/Yen (USD/JPY): Expect low pressure on the pair (Iene strengthening) as the interest differential decreases.

• Risk Assets: The end of Japanese cheap money is a reverse wind for global actions.

This is another sign that the easy liquidity cycle is facing structural challenges, which ironically can speed up the crisis that will force Western central banks to print even more.

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