Yen (and developing EUR/CHF) reverse carry trade — the deleveraging trigger

Built from research/macro-carry-trades.json (web-verified: BOJ reporting, Investing.com, Deriv, Stapleton AM, EBC, Mesirow, Capital.com). Quantified live in the Charts tab (the US−Japan 10Y differential and JGB level).

Thesis. The AI / mega-cap trade is the crowded "risk-on" destination funded, at the margin, by cheap carry borrowing. As the cheapest funding currencies (JPY, then CHF) normalize, the carry math breaks and forced deleveraging can hit FX, equities, and credit simultaneously — the clearest exogenous trigger that could force-sell the AI bubble.

1. The mechanism

Borrow JPY/CHF near zero → convert → buy higher-yielding/risk assets (US tech/AI prominent). Rising BOJ rates plus ~2.8% JGB 10Y yields (highest since 1997) shrink the spread and strengthen the yen, forcing position liquidation. Because the carry is leveraged and crowded, the unwind is non-linear and correlation-spiking — it deleverages the most crowded longs (Mag7/AI) regardless of fundamentals.

2. The yen leg (the primary vector)

• BOJ path: 0.5% (Jan 2025) → 0.75% (Dec 19 2025) → ~1.0% expected (mid-2026). JGB 10Y ~2.8%. Fact.
• Carry size: estimated peak $300–500B. Estimate (graded).
• Unwind window: peak repatriation Nov 2025–Feb 2026; added pressure into the Japanese fiscal year-end (Mar 2026).
• Precedent (proof the channel transmits globally in hours): Aug 5 2024 — a sharp yen-carry unwind crashed the Nikkei (~−12% in a day) and spiked global volatility. Fact.

3. The developing EUR/CHF leg (secondary vector)

The Swiss franc is the classic secondary funding currency; the SNB is expected to hold ~0% well into 2026, anchoring cheap CHF funding (EUR/CHF ~0.94). A second carry vector builds as euro-area growth firms. Graded: developing.

4. Why it matters to the bubble (the exogenous-shock channel)

This is the cleanest exogenous shock node for the formal cascade model (models/tla): a carry-unwind / rate-shock that simultaneously

1. raises the discount rate on the AI core's back-loaded RPO/backlog,
2. re-widens bank HTM unrealized losses (macro-fdic, macro-bank-htm-marks), and
3. forces selling of the crowded AI trade —

any one of which can flip the circular core from "solvent-while-inflows-continue" to "insolvent" (the Z3 theorem T4 condition). It is tracked live on the unwind watch-list (spec-unwind-timing): the US−Japan 10Y differential has compressed from a peak ~3.85pp (Oct 2023) toward ~1.8–2.0pp as the JGB climbed — the carry's fuel draining is the "ARMING" state, not yet "firing."

5. Limits

Carry-trade size is an estimate (positions are not centrally reported); the unwind's timing is not forecastable (only its triggers are observable — see spec-unwind-timing). The Aug-2024 episode is the empirical proof-of-mechanism; the 2025–26 normalization is the live test.

Sources: Investing.com — BOJ/carry, Deriv — USDJPY carry breakdown, Stapleton AM — reverse carry & global consequences, Mesirow — the quiet engine of global risk, Capital.com — EUR/CHF.

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