The Carry Crisis
From Tokyo to Wall Street / Christmas edition
There is a paradox at the heart of modern finance that few understand and even fewer discuss openly. A weakening Yen, for decades, seemed to signal confidence, liquidity, and economic expansion. Yet beneath this surface, an entirely different narrative is playing out—one where the very same movements that appeared benign for three decades are now the warning bells of a systemic catastrophe.
On December 20, 2025, the USDJPY pair sits at 157.703. This level has provoked confusion among traders and analysts. Some see strength in the dollar. Others see weakness in the Yen. Most miss the critical point entirely: we are standing at a technical and structural inflection point where the mechanics of the global carry trade—a system that has enriched the few and indebted the many for over three decades—are beginning to reverse with potentially catastrophic consequences.
The question at the heart of this analysis is deceptively simple: If the Yen is weakening further, does that represent a bid for the Dollar from liquidations, necessitating the selling of US bonds to obtain dollars in the offshore markets?
The answer requires understanding the distinction between two very different market regimes: the normal carry trade expansion, and the carry trade unwind. And it requires recognizing that the current technical setup in USDJPY is not a sign of health, but a sign of fragility—a system running out of collateral, energy, and time.
The USDJPY Chart—What It Really Shows
To understand the current juncture, we must first read the chart correctly. The USDJPY chart shows a clear historical trajectory:
2013-2024: The Carry Trade Expansion Era — USDJPY rallied from approximately 100 to a peak of 162.00 in October 2024. This was a massive, eleven-year weakening of the Yen.
October 2024-December 2025: The Correction Phase — From the 162.00 peak, the pair has pulled back to 156.57 (the lower trendline shown in blue), representing a retracement of roughly 5.43 yen or about 3.3% of the total move.
Current Level: 157.703 — We are oscillating in a narrow band between the recent lows around 155-156 and resistance around 160-162.
This is not a picture of structural Yen strength. This is a picture of consolidation before a decision point.
To clarify the mechanism: in USDJPY, when the number goes DOWN, the Yen goes UP (strengthens). When the number goes UP, the Yen goes DOWN (weakens). At 157.703, we are still elevated on a historical basis, but we are significantly below the October peak. The 20-period SMA (Simple Moving Average) on the chart shows the trend is currently neutral, oscillating around 155-156.
But here is the critical insight: this consolidation is not a sign of equilibrium. It is the eye of a hurricane.
The Normal Cycle—Weak Yen as a Carry Trade Expansion Signal
To understand what happens next, we must first understand what a normal weakening of the Yen represents in the context of the carry trade.
The Mechanics of Carry Expansion
When the Yen weakens over a sustained period (USDJPY rises from 100 to 162), the following sequence occurs:
The Incentive: A weak Yen makes borrowing in Yen extremely cheap relative to the yields available in other currencies. A trader can borrow at 0.5% in Yen and lend at 4-5% in Dollars, earning a 4.5% carry with minimal apparent risk.
The Capital Flows: Japanese investors, pension funds, and global carry traders borrow in the Yen market. They convert these Yen into Dollars (selling Yen, buying Dollars).
The Asset Bid: With Dollars in hand, they purchase US Treasuries, US equities, corporate bonds, emerging market debt, real estate—anything yielding more than the Yen carry cost.
The Liquidity Expansion: This process injects massive amounts of capital into global asset markets. There is a continuous bid, supporting prices, suppressing volatility, and creating the illusion of a “risk-free” world where capital always flows into assets and volatility always declines.
The Currency Effect: As trillions of Yen are converted to Dollars, the Yen naturally weakens (more supply of Yen hitting the market). The Dollar strengthens relative to the Yen (but this is a benign form of dollar strength because it is driven by productive capital flows into assets).
For the eleven-year period from 2013 to 2024, this expansion was the dominant regime. Every dip in risk assets was bought. Every spike in volatility was sold. The carry trade was the “one-way trade” that couldn’t lose because central banks had socialized the downside risk. Every time the trade threatened to unwind (2015, 2018, 2020), central banks flooded the system with liquidity, restarting the carry expansion.
In this environment, a weakening Yen (rising USDJPY) is a sign of health and confidence. It is a sign that the carry trade is working, that capital is flowing into assets, and that the system is expanding. This is the “good” scenario.
Why This Seemed Sustainable
The Japanese carry trade has been the foundational funding source for global asset prices for over 30 years. The BoJ’s policy of maintaining zero rates—even after the deflationary crisis of the 1990s ended—created a structural imbalance that was profitable to exploit.
A Japanese investor or global hedge fund could:
Borrow 100 billion Yen at 0.1%
Convert to $700 million USD (at the old rates)
Buy US Treasuries yielding 4-5%
Earn $28-35 million annually on the yield, minus $100,000 on the Yen borrow
Net: $27.9-34.9 million profit on $700 million capital
This trade scaled to trillions. By some estimates, the total funding base of this carry trade reached $20-25 trillion, which when leveraged 20x, created a $400-500 trillion asset price bubble.
The weak Yen was not a problem; it was a feature. It meant the trade was working, capital was flowing, and asset prices were levitating.
The Liquidation Dynamic—Strong Yen and a Spiking Dollar as Carry Trade Unwind Signals
But carry trades, always end. They end in the “sawtooth” pattern: long periods of steady gains punctuated by sudden, catastrophic losses. And the unwind mechanism is the inverse of the expansion mechanism.
The Trigger
A carry trade unwind begins with a trigger—an event that makes traders nervous about holding their positions. Possible triggers include:
Central Bank Policy Shift: The Bank of Japan raises rates or signals tightening (as we saw in 2024).
Recession Fear: Economic data weakens, equity multiples compress, and the “risk-free” assumption breaks.
Geopolitical Shock: War, political instability, or sanctions create uncertainty.
Credit Event: A major financial institution fails or shows signs of stress.
Collateral Shortage: The offshore Eurodollar system dries up, and borrowing costs spike.
The Unwinding Sequence
Once the trigger is pulled, the sequence reverses:
The Panic: Traders, particularly highly-leveraged hedge funds and shadow banks, realize their positions are underwater or face margin calls. They must reduce risk.
The Asset Sales: To reduce risk and raise cash, they sell their largest positions—US equities, Treasuries, corporate bonds, real estate, and emerging market debt. The selling is indiscriminate and forced.
The Currency Conversion: To pay back their Yen loans, they must convert Dollars back into Yen. They sell Dollars and buy Yen. This reverses the multi-year carry trade capital flow.
The Yen Strengthening: As trillions of Dollars are sold and Yen are purchased, the Yen naturally strengthens (less supply of Yen, more demand for Yen). USDJPY crashes downward.
The Margin Call Cascade: As Yen strengthens, the value of the collateral (in Yen terms) falls for traders who borrowed Yen. They are forced to sell more assets to maintain their margin requirements. The selling accelerates.
The Systemic Breakdown: The selling of assets drives volatility higher, which triggers volatility-based margin calls. Hedge funds and levered players are forced to liquidate. The VIX spikes. Credit spreads widen. The credit system seizes.
Historical Precedent: 2007-2009 and 2020
We have seen this unwind before. In 2008-2009, the carry trade (particularly the Dollar-funded version) unwound spectacularly. Global equities crashed 50-60%. The Yen strengthened (USDJPY fell from 110 to 85). The credit system seized. It took massive central bank intervention and trillions in liquidity to stabilize.
In March 2020, a similar pattern emerged on a smaller scale. The Yen strengthened dramatically as traders rushed to cover their short Yen positions. The S&P 500 crashed 34% in a month. The VIX spiked to 85. But again, central bank intervention—unlimited QE, zero rates, currency swap lines—stopped the unwind.
Each time, the unwind was interrupted before it could complete. Each time, the carry trade was re-leveraged at even higher levels. And each time, the next potential unwind became larger.
The Critical Distinction: Normal Unwind vs. Collateral Crisis Unwind
There is an important distinction between a normal carry trade correction and a systemic carry trade implosion with a collateral crisis.
A normal correction might see:
USDJPY falling from 162 to 150 (Yen strengthening, a 7-8% move)
S&P 500 falling 15-20%
The VIX spiking to 40-50
Central banks quickly intervening and stabilizing the system
Dollar Index (DXY) rising moderately to 105-108 (a modest flight to quality)
A systemic implosion with a Collateral Crisis (the “Dollar Wrecking Ball”) would see:
USDJPY falling from 162 to 130 or lower (massive Yen strengthening, a 20%+ move)
S&P 500 falling 40-60%
The VIX spiking to 80-100+
Dollar Index (DXY) spiking violently to 115-125+ (a desperate global scramble for Dollars)
Treasury yields spiking to 6-8%
The failure of central bank interventions to stabilize the system
A debt deflation spiral where falling asset prices trigger more forced selling
We are approaching the latter. The the grand shock is not a normal correction but a systemic implosion with a collateral crisis.
The Eurodollar Shortage and the Dollar Wrecking Ball—The Most Dangerous Scenario
Here is where the true danger emerges. This is the scenario where a spiking Dollar destroys everything.
The offshore Eurodollar market is the shadow banking system. It is where most global credit creation happens, outside the regulatory purview of the Federal Reserve.
When a bank lends a Dollar-denominated loan outside the US (for instance, a European bank lending to a Japanese company), that Dollar never physically leaves the US financial system. Instead, it circulates in an accounting system of electronic claims—”virtual Dollars” or “Super Dollars”.
These virtual Dollars are created through a multiplier effect. A single Federal Reserve Dollar can be re-hypothecated, lent out, borrowed back, and relent dozens of times. This multiplier effect is what powered the massive expansion of global asset prices—not the Fed’s official money supply, but the offshore Eurodollar multiplication of that supply.
The system worked perfectly as long as trust was maintained and collateral was available. Banks trusted each other to pay back their dollar loans. High-quality collateral (US Treasuries, Agency bonds) could be pledged and re-pledged multiple times, creating tremendous leverage.
The Collateral Crisis: The Dollar Shortage Paradox
But the system is now facing a collateral shortage. This creates a paradox: the world owes too many Dollars, but there aren’t enough “good” Dollars to service the debt.
Why?
Fiscal Deterioration: The US government is running massive deficits. The Treasury needs to issue trillions in debt. The traditional buyers (foreign central banks, the Japanese carry trade) are stepping back. This means the Treasury must offer higher yields to attract buyers.
Regulatory Changes: Post-2008 regulations require banks to hold more capital against leverage. The “plumbing” of the Eurodollar system has been clogged.
Quality Degradation: What was once “pristine collateral” (US Treasuries) is becoming suspect. If yields on Treasuries spike too high, existing bondholders face mark-to-market losses. This reduces the collateral available to pledge.
The Repo Crisis Precursor: In September 2019, the Fed briefly lost control of the Repo market—the overnight funding market where banks lend cash against collateral. Rates spiked to 10% on what should have been risk-free overnight borrowing. This was a warning shot.
The “Dollar Wrecking Ball” Scenario: The Death of the Super Dollar
In this scenario, the Eurodollar system experiences a bank run mentality. Everyone tries to get out of dollar-denominated assets and into actual US Dollars (physical cash or Fed reserves). But here is the critical paradox: there are not enough actual Dollars to meet the demand.
The sequence would be:
The Trigger: A major financial institution shows signs of stress, or the BoJ raises rates more aggressively, or there is a geopolitical shock.
The Margin Call: Traders and institutions face margin calls and need to raise dollars immediately. They cannot wait for orderly sales.
The Panic Liquidation: They sell everything—US equities, US Treasuries, Yen positions, emerging market debt, commodities, crypto. Everything converts to Dollars as a flight to safety.
The Dollar Spike: Despite massive selling of US assets, the US Dollar itself spikes violently in value (DXY could reach 115-125+). This happens because everyone is trying to get actual Dollars and there is a shortage of actual Dollar liquidity in the offshore system.
The Treasury Crash—But With a Twist: Even as the Dollar spikes, US Treasury yields spike dramatically (long-term yields could reach 6-8%). This seems counterintuitive because usually, a strong dollar and rising yields go together. But this is the sign of a true collateral crisis:
Forced selling of Treasuries pushes yields up
The demand to hold Treasuries collapses as investors need to raise Dollars for margin calls
The multiplier effect of the Eurodollar system collapses, reducing demand for long-duration assets
The Fed’s ability to stabilize yields is questioned because the Fed cannot print Dollars that are acceptable as collateral
The Global Doom Loop: Everything crashes in Dollar terms:
Emerging market currencies collapse (they owe Dollars)
Global equities crash (they are priced in Dollars, and Dollar credit is frozen)
Commodities crash (priced in Dollars, and speculative positioning unwinds)
Real estate crashes (much is financed in Dollars)
Even Gold could crash temporarily (because investors liquidate everything to raise Dollar collateral)
The Sovereign Default Wave: Countries that borrowed in Dollars cannot service their debt as the Dollar spikes. Argentina, Brazil, Turkey, and other emerging markets face sovereign debt crises. This further spikes the Dollar as investors flee these markets.
The Systemic Breakdown: The system experiences a deflationary implosion. The Fed’s ability to intervene is constrained because you cannot print collateral. A new monetary regime must be established.
When This Happened Before: March 2020
This exact scenario played out in miniature in March 2020. Here is what happened:
Feb 28-Mar 23, 2020: The S&P 500 fell 34%. The VIX spiked to 85.
The Bond Crash: Treasury yields initially fell, but then the bond market became disorderly. The bid-ask spreads widened. The ability to sell Treasuries collapsed.
The Dollar Spike: The Dollar Index (DXY) spiked to 103. This is the critical sign of a collateral crisis. Even as US stocks crashed, the Dollar spiked because everyone needed Dollars to meet margin calls.
Emerging Market Implosion: Emerging market currencies crashed 20-30% in a matter of weeks. Their Dollar debt became unserviceable.
The Fed’s Response: The Fed announced unlimited QE, cut rates to zero, reopened dollar swap lines with foreign central banks, and set up an emergency lending facility (the Primary Dealer Credit Facility). This stopped the unwind by flooding the system with actual Dollars and explicitly guaranteeing that the Fed would backstop the Eurodollar system.
But crucially, the Fed could not indefinitely provide Dollars to the entire global financial system. It would have required printing trillions. Instead, it stabilized the system just enough to restart the carry trade expansion at even higher leverage.
We are now at or near the “Vanishing Point” . The interest rate spreads that powered the carry trade have compressed to near-zero. The Yen is still relatively weak, but the BoJ is raising rates. The Treasury yield curve is inverted. The Repo market is showing signs of stress again.
Most importantly, collateral is scarce, and the Fed’s ability to create collateral is limited. Printing more Dollar bills does not create the high-quality collateral that the Eurodollar system needs to function. In 2020, the Fed’s intervention worked because it came quickly and the collateral shortage was not as severe. Today:
The fiscal situation is worse
The collateral base is smaller
The size of the Eurodollar system is larger
The interconnectedness of the global financial system is greater
The Fed’s room to print is more constrained (higher inflation, fiscal concerns)
In a collateral shortage, the Fed cannot print its way out as easily as it did in 2020. The “Super Dollar” system is at the breaking point.
The consolidation pattern in the 155-162 range represents maximum vulnerability and maximum danger. The system is at a pivot point:
Scenario 1: The Carry Trade Re-Leverages (USDJPY breaks above 162)
This would mean the recent weakness was just a shake-out
More capital would flow into the carry trade
Asset prices would continue higher
The Yen would weaken further, fueling the expansion
But this would only defer the eventual unwind and make it more severe
Scenario 2: The Normal Carry Unwind Begins (USDJPY breaks below 155 towards 140)
Japanese investors and hedge funds begin covering their short Yen positions
The Yen strengthens (USDJPY falls)
US assets sell off in an orderly fashion
The VIX spikes to 40-50
The Dollar Index rises modestly to 105-108 (flight to safety, but not crisis-level)
Central banks intervene and the system stabilizes (as it has in past unwinds)
This is a correction, not a collapse
Scenario 3: The Collateral Crisis Erupts (The Dollar Wrecking Ball)
USDJPY crashes below 140, possibly to 120-130 (massive Yen strengthening)
SIMULTANEOUSLY, the Dollar Index spikes to 115-125+ (a desperate scramble for Dollars)
US Treasury yields spike to 6-8% despite massive selling
US equities crash 40-60%
Emerging market currencies collapse
Sovereign defaults cascade
The Fed’s interventions fail to stabilize the system
Systemic deflation and a potential debt implosion ensues
This third scenario is what the “Grand Shuher” looks like. It is the most likely scenario given the structural vulnerabilities in the system.
The Collateral Question—Why US Bonds AND the Dollar Can Both Spike
Your original question about “selling US bonds to get hands on USD in the offshore markets” reveals the critical vulnerability in the current system.
In a normal carry trade expansion, US Bonds are bid because:
Carry traders want the yield
The BoJ and other foreign central banks are buying
There is strong demand across the curve
The system is awash in collateral
But in a collateral crisis, the demand structure inverts in a paradoxical way:
Margin Calls Force Bond Sales: Traders need cash (and collateral) immediately. They sell their largest, most liquid positions first—US Treasuries. This pushes yields UP.
Collateral Rehypothecation Breaks: In normal times, a US Treasury purchased for $1 million can be pledged as collateral multiple times, creating $20-30 million in effective purchasing power. When trust breaks and the Eurodollar system seizes, this multiplier collapses instantly. Institutions realize they don’t have enough high-quality collateral. They must sell assets to reduce leverage.
The Eurodollar Shortage: If the Eurodollar system is facing a Dollar shortage, banks and institutions will sell their safest, most liquid assets (Treasuries) to convert to actual Dollar bank reserves or Fed liquidity facilities. This creates a counterintuitive dynamic:
US Bonds are sold (yields spike to 6-8%)
Simultaneously, the Dollar spikes (DXY to 115-125+)
Both happen at the same time because everyone is desperate for actual Dollars or high-quality collateral, not Dollars that exist only as accounting entries in the Eurodollar system
This is the scenario that makes the current technical setup so dangerous. We are in a period where:
Treasury yields are elevated (4-5% range)
Yet there is evidence of stress in the credit markets (the Repo market showed early warning signs in 2019)
The traditional buyers (Japanese carry traders, foreign central banks) are receding
The multiplier effect of the Eurodollar system is fraying at the edges
If a shock hits that triggers forced selling of Treasuries, yields could spike to 6%, 7%, or even 8% as the system deleverages. Simultaneously, the Dollar would spike because there is a shortage of real Dollars. This would devastate:
The US budget (higher refinancing costs)
Emerging markets (their Dollar debt becomes unserviceable)
Global equities (priced in Dollars, and credit is frozen)
Real estate (much is financed in Dollars)
The Historical Context—Why a Strong Dollar Is Historically Destructive
To fully understand why the current setup is so dangerous, we must look at historical periods of rapid Dollar strength. Every major financial crisis in the last 50 years has coincided with a spiking Dollar.
The Pattern
1980s Latin American Debt Crisis: Paul Volcker hiked US interest rates to kill inflation. The Dollar spiked (DXY from 90 to 120+). Latin American countries, who had borrowed massively in Dollars, could not service their debt. Mexico, Argentina, Brazil all defaulted or restructured. The crisis spread globally.
1997 Asian Financial Crisis: The Dollar strengthened as the Fed raised rates. Asian economies, many of which had pegged their currencies to the Dollar or borrowed heavily in Dollars, faced devaluations and a credit implosion. Thailand, Indonesia, South Korea, Russia—all imploded.
2008 Financial Crisis: In the depths of the crash, the Dollar spiked (DXY went from 80 to 88). This seemed counterintuitive because the crisis was in the US. But it reflected a global liquidity crisis: everyone needed Dollars to pay back Dollar debts. The Lehman collapse had revealed that the Eurodollar system was broken. Banks stopped trusting each other. A desperate scramble for Dollar liquidity ensued.
March 2020: The DXY spiked to 103. The S&P 500 fell 34%. Emerging markets crashed 30-40%. The Fed had to intervene massively to prevent a systemic collapse.
The Rule:
A gradually strengthening Dollar due to US economic outperformance can be managed by the global economy.
A spiking Dollar due to a collateral crisis = Systemic Destruction.
The current setup suggests we are on the precipice of the latter.
Conclusion
The current level of USDJPY at 157.703 is not a sign of health. It is a sign of exhaustion and maximum fragility. The 11-year carry trade expansion from 100 to 162 has run its course. The collateral base has degraded. The Yen is starting to strengthen. And the Eurodollar system is showing signs of stress.
The question is not whether the carry trade will unwind—it will. The question is how destructive the unwind will be.
The Three Possible Paths Forward
Path 1: The Re-Leveraging (Bull Case)
USDJPY breaks above 162
The carry trade re-expands
Asset prices rally to new highs
The system survives for another 1-2 years
But the eventual unwind becomes more severe
Path 2: The Normal Unwind (Base Case)
USDJPY breaks below 155 towards 140
Equities correct 15-20%
The VIX spikes to 40-50
The Yen strengthens in an orderly fashion
Central banks intervene
The system stabilizes
Path 3: The Dollar Wrecking Ball (Tail Risk / Most Likely Given Collateral Shortage)
USDJPY crashes to 130 or lower (massive Yen strengthening)
SIMULTANEOUSLY, the Dollar Index spikes to 115-125+ (a collateral crisis)
US Treasury yields spike to 6-8%
US equities fall 40-60%
Emerging markets implode
Sovereign defaults cascade
The Fed’s interventions fail to stabilize
Systemic deflation ensues
Based on the structural signals described in this article —the collateral shortage, the fraying of the Eurodollar system, the exhaustion of yield spreads, the Repo market stress—Path 3 is increasingly likely.
The “weak Yen” that seemed like a sign of strength for eleven years may soon be remembered as the greatest leveraged bubble in financial history. When it collapses, it will not just bring the Yen, the Carry Trade, and asset prices down. It will bring the entire global financial system to the brink through a spiking Dollar that crushes debtors worldwide.
The signal to watch:
USDJPY below 150: Early warning. The unwind has begun.
USDJPY below 140 + DXY above 110: High alert. The collateral crisis is underway.
USDJPY below 130 + DXY above 115: Red alert. The Dollar Wrecking Ball is swinging.
When that moment comes, every asset priced in Dollars will face intense selling pressure. Bonds will not be “safe”—yields will spike and mark-to-market losses will be severe. The only safe assets will be those outside the Dollar system: physical gold, tangible real assets, and perhaps some cryptocurrencies (if they survive the liquidation phase).
The clock is ticking. The system is running out of collateral. And the Dollar, the world’s most critical currency, may soon become the world’s most destructive weapon—not out of intent, but out of desperation as the Eurodollar system finally breaks under the weight of three decades of leverage and lies.
