Japan's Currency Problem Is Starting to Leak Into U.S. Markets

The US Treasury stepped in to buy Japanese yen. The reason runs through a trade that has been building for decades.

Decades of borrowing at zero

Large financial institutions, hedge funds among them, have borrowed in Japan at roughly 0% for decades and converted that money into US dollars. The trade works as long as Japanese rates stay on the floor. When rates in Japan start to rise, that borrowing has to be repaid, and investors sell US assets to bring dollars back to Japan and cover the loans.

Why it shows up in US interest rates

Selling dollars to buy yen makes the yen stronger, which makes the trade more expensive to hold, which forces more selling. The problem snowballs on itself. Headlines frame the recent rise in interest rates as a story about inflation and oil prices, but the other side of it is investors selling US Treasuries to convert back into yen. When Treasuries get sold, US interest rates go up.

Where it leaves the market

Bessent is close to a no-win situation, and threading the needle is difficult. He has to signal that the US will help make the yen stronger, which forces the deleveraging, while at the same time keeping Japan from selling US Treasuries. Things have eased somewhat, with stocks jumping over the past couple of days after he said the US would step in to help. It could still mean some rocky roads ahead.