The interest rate on the 10-year Japan Government Bond (JGB) rose gradually from 1.60% at the beginning of April to 1.63% at the beginning of November, 2025; but has surged since then to 2.26%, threatening hundreds of hedge funds and other financial firms, as well as individual Japanese investors, with having to take losses unwinding their trades in the “yen carry trade.”
Japan’s new Prime Minister Takaichi Sanae took office on Oct. 21, and has pulled something of a “Liz Truss” (the British Prime Minister who in September 2022 was forced from office when suddenly rising Sterling interest rates caused a pension funds crisis). Like Truss, Takaichi proposed to cut taxes and sharply raise government spending; now she has called a snap election to try to get a mandate for these cuts and increases.
The speculative and usually lucrative yen carry trade depends on very low interest rates on Japanese government bonds. The losses of hedge funds in the carry trade, and not Trump’s threats of “Greenland tariffs,” appeared to be what caused the 900-point U.S. stock market plunge on Jan. 20. The Trump Administration immediately intervened twice: first by signaling U.S. readiness to buy yen in order to suppress the dollar’s value in yen; and then by Trump’s order to Fannie Mae and Freddie Mac to buy $200 billion of mortgage-backed securities (MBS), to push 10-year Treasury (and 30-year fixed mortgage) interest rates down when the JGB turmoil drove them up. The first had an effect; the second did not, because Fannie and Freddie lacked the liquid funds to buy so many MBS.
