The biggest black swan in the market now is not the Federal Reserve, but Japan

Today I will prepare a detailed introduction on why Japan has suddenly become this black swan

This introduction will try to avoid professional terminology and will attempt to explain the underlying principles from a beginner's perspective

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Chapter One (Japan's Disappearing 30 Years)

In the past 30 years, the Japanese economy has been like a sick old man suffering from "deflation." Prices of goods in supermarkets drop daily, and you think tomorrow will be even cheaper, so you decide to "wait a little longer." Everyone thinks this way, resulting in no one spending money, factories making no profit, having to cut salaries and lay off workers, and people having even less money to buy things, starting a vicious cycle. Therefore, the Bank of Japan started to pull out all the stops. To force everyone to spend money, the Bank of Japan lowered interest rates to 0%, and even into negative territory. This means that money kept in the bank not only earns no interest but also incurs fees.

Since Japan's money is almost interest-free when borrowed, the world's smart people (hedge funds, Wall Street big shots, old man Buffett) have thought of a way to make a fortune, called 'yen arbitrage trading.' Borrow yen in Japan, exchange it for dollars, and buy U.S. Treasury bonds (with a 5% interest) or buy Bitcoin, U.S. stocks, etc. For decades, Japan has been like a 'free ATM,' continuously lending money to the world for stock and cryptocurrency speculation.

Chapter Two (Great Transformation, Japan's Awakening)

In 2024, the situation changed. The Japanese economy not only recovered but was also somewhat 'excited.' Prices began to rise (inflation), and more importantly, employers were finally willing to significantly raise wages. Wages increased—everyone dared to spend money—prices continued to rise. The Bank of Japan thought: 'Since the economy has normalized, I can no longer give away money for free.' Thus, it decided to raise interest rates. At the end of July 2024, the Bank of Japan slightly raised the interest from 0.1% to 0.25%. You might ask: 'Only raised by 0.15%, what does that amount to?' But for those who borrowed hundreds of billions to play with leverage, this is catastrophic. However, in reality, statistics show that the total amount of 'wool' taken from Japan globally is not hundreds of billions, nor thousands of billions, but nearly '20 trillion!'.

The cost of borrowing increased, the yen became more expensive, and the previously borrowed amount that only needed to be repaid was 600,000 USD. With the appreciation of the yen, you suddenly need to repay 700,000 USD. Everyone at the same time thought: 'Quickly sell the U.S. stocks, U.S. Treasury bonds, Bitcoin to exchange for yen to repay the debt!' The Japanese stock market fell by 12.4% in one day, setting a historical record, which is known as the famous 'Black Monday.' During the same period, Bitcoin dropped nearly 18%; when the world faces the need to repay debts, Bitcoin is always the first asset to be sold off.

Chapter Three (Will the Black Swan Arrive as Scheduled?)

If you have understood the logic above, you will know that if Japan maintains a 0% interest rate, it can drive global financial assets up. Conversely, if interest rates are raised, the entire transaction will turn into a 'death spiral,' with funds being forced to withdraw. It’s not about whether you want to sell; it's about whether you must sell.

Now the world faces a reality for the first time: Japan is no longer at zero interest rates. The market is not afraid of whether interest rates will be raised, but rather 'when the stampede will begin.'

The yield on Japan's 10-year government bonds is now approaching 2%, returning to levels seen 17 years ago, and the goalkeeper is about to lose his grip. If they forcibly defend, the yen exchange rate will collapse; if they give up defense, interest rates will soar. Choosing the lesser of two evils, the central bank ultimately can only choose to comply with the market and gradually raise interest rates.

Additionally, the Bank of Japan has preemptively 'showed its cards' this time; the governor directly mentioned the December meeting last week, stating that 'decisions will be made as appropriate.' Historically, Japan has always been 'sparse with words,' not announcing rate hikes but explaining after they have occurred. However, now they are actively adopting a hawkish stance, effectively testing the market's tolerance. If the market does not collapse, they will proceed to raise rates; if the market reacts too violently, they will think of other methods, but the overall direction will not change significantly.

Therefore, it is almost certain that Japan will raise interest rates, as raising rates is a good thing for Japan's economy. This is not an exception, but a trend. What is uncertain is the progress of the rate hike, the magnitude of the rate hike, and other accompanying measures.

Ultimately, whether Japan's interest rate hike will evolve into a super 'black swan' that collapses the global market is something no one can be 100% certain about. However, in this era full of uncertainties, we must build a 'dam' of risk awareness in advance. The core issue is not about predicting the future, but about asking ourselves: 'If the flood really comes, can the positions I hold withstand it?'

Only by preserving the principal during a storm can you truly hold the ticket to enter the next spring.
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