A major shift in global capital flows: US Treasury sell-offs and yen repatriation – how should investors adjust their strategies?

Global capital is already beginning to shift the US cut interest rates as expected by 25 basis points so one shoe has already dropped now we wait for the other one and the other shoe is Japan

According to the information released so far next week around the 18th to 19th the Bank of Japan will very likely announce a rate hike after 30 years they may finally raise rates above 0 point 5 percent to around 0 point 75 once Japan raises rates global capital flows will start to change and global assets will go through a new round of reallocation

Why is that Japan has kept ultra low interest rates for decades so investors borrowed yen and moved the money into higher yielding US assets to earn the spread the yen carry trade at its peak reached around 5 trillion dollars but now the two countries are moving in opposite directions one cutting rates one raising them so the interest rate spread will quickly shrink or even disappear to avoid losses carry traders will rush to unwind selling US stocks US bonds and other dollar assets converting to yen and sending funds back to Japan

We cannot predict long term trends but in the short term exchange rates will definitely swing sharply the dollar will weaken the yen will continue to strengthen and the US will almost certainly keep cutting rates next year according to their own statements current rates are still at the upper end of the neutral range meaning still a bit too high and very likely to be cut again in Q1 next year Morgan Stanley even predicts that by Q1 of 2026 USD JPY could fall to 140 a big move from the current level above 150 these currency swings will directly affect exports a weaker dollar boosts the competitiveness of US goods while a stronger yen makes Japanese goods more expensive increasing pressure on Japan’s export sector

History may sound familiar in the 1980s this is how the US weakened Japans once dominant Made in Japan manufacturing of course that is a bit of a joke but the next asset likely to be hit hard is US Treasuries foreign investors hold about 35 percent of all outstanding Treasuries if carry trade funds exit the US there will be large scale selling prices will fall yields will rise and since Treasuries are the anchor of global asset pricing higher yields mean global risk free benchmark rates will rise pushing financing and debt issuance costs higher around the world

Capital always seeks opportunity if it cannot earn carry here it will look elsewhere so investors will search for new safe haven or arbitrage opportunities leading to another round of major global asset reallocation

That is the situation if you currently hold US dollars US Treasuries or yen denominated assets you can adjust accordingly but remember to hedge your risks and allocate in stages