At each Bank of Japan (BoJ) meeting, the alarmist narrative resurfaces: "Trillions of dollars in carry trade will implode global markets."
But when we look at the primary data and not the headlines, the story is different. Analyzing two critical liquidity and positioning indicators:
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Speculative Positioning (CFTC) At the beginning of 2024, the market carried a massive short position in Yen (-200,000 contracts). When the Bank of Japan signaled normalization, we saw the August "purge." The scenario today? It's reversed. The market is long (Net Long +65k contracts). The speculative "weak hand" has already been eliminated. There is no longer pent-up selling pressure to cause a squeeze.
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Bank Funding (Call Money) In 2008, foreign banks held peaks of ¥114 trillion in short-term loans in Japan – the classic fuel of global leverage. Today? We are at the lows, near ¥15 trillion. Structural funding in Yen has dried up.
Where is the money now? (The Rotation) Capital doesn't disappear, it migrates. With the strengthening of the Yen, carry trade sought new destinations, the main one being Switzerland. A significant portion of this global leverage rotated to the Swiss Franc (CHF).
Conclusion: If speculators are at zero and banks aren't financing trade via Tokyo, Japan's carry trade no longer has the relevance that most people imagine.
Does this mean we are risk-free?
No.
The structural repatriation of Japanese pension funds may still put pressure on US Treasury bonds. But this is a slow and somewhat predictable flow, not a panic sell-off event.
The next risk-off event has a different trigger as a candidate, and not for now, but that's a topic for future posts.