If you want to understand why markets sometimes crash for 'no reason,' you need to understand the yen carry trade. It's arguably the largest hidden liquidity force in global markets.

How It Works:

1. Borrow yen at near-zero rates (Japan has had ~0% rates for decades)
2. Convert yen to dollars (or other higher-yielding currencies)
3. Buy US assets (Treasuries, stocks, corporate bonds)
4. Pocket the yield difference (5%+ spread in recent years)

This is free money — as long as the yen stays weak. The trade is profitable because you're borrowing cheaply and investing in higher yields.

The Scale:

Estimates suggest hundreds of billions to trillions of dollars in carry trade positions. This is HIDDEN LIQUIDITY — it doesn't show up in Fed data, central bank balance sheets, or traditional liquidity measures. But it's very real.

When It Unwinds:

The danger is when the yen strengthens — especially RAPIDLY:

1. Carry traders face losses (yen debt grows in dollar terms)
2. Margin calls hit
3. Forced selling of US assets to buy back yen
4. Stocks, bonds, crypto ALL sell simultaneously
5. Yen strengthens further (more buying)
6. More forced selling

This is a doom loop that can take markets down 10-15% in DAYS.

The August 2024 Example:

In early August 2024, the BoJ signaled potential rate hikes and the yen surged ~5% in days. Global markets crashed — stocks, bonds, crypto all fell together. There was no US economic news, no Fed change. It was purely carry trade unwinding.