The $20 Trillion Carry Trade Has Finally Blown Up

Late last year, when the latest cycle of the yen carry trade was still in its relative infancy (the USDJPY was in the low 140s then, on its way to a mindblowing and inflation-unleashing 162, not to mention two BOJ intervention), we explained why Japan's economy is now effectively dead, and the only thing missing was declaring the time of death. The reason: the $20 trillion carry trade that the government of Japan has been engaging in for the past 40 years has been one giant a ticking timebomb, one which can not be defused, and when it blows up, it's game over for the Bank of Japan.

Why? well, with the help of DB's chief FX strategist George Saravelos we explained why last December when we also quantified the total size of the trade whose blow up will demand a coordinated central bank rescue in the coming days (not surprisingly the world's central bankers have no idea what has happened and will be panicking after the fact as usual, and unleashing a historic flood of rate cuts in the coming weeks to stabilize the situation).

For those who missed it back in December, here it is again, only this time the carry trade has burst, and either the BOJ will do nothing and watch as its economy implodes, or it will panic reverse the idiotic rate hike it did last week and triples down on easing to contain the crash that just pushed the Nikkei into a bear market; in either case, however, it is unfortunately game over for Japan.