https://no01.substack.com/p/twilight-over-the-rising-sun
No1
Aug 04, 2026

On the last trading day of 1989 the Nikkei closed at 38,915.87 and the grounds of the Imperial Palace in Tokyo were worth more than the state of California.

~3.4km² worth more than ~424,000 km². Silver is taking notes - I hope.

Thirteen of the world’s largest companies by market value were Japanese (7 of which banks). Tokyo’s exchange was somewhere around 42% of all equity value on earth, up from 15% in 1980. Japanese shares traded at sixty times earnings while the S&P sat at fifteen, and MIT economists were writing that the next century belonged to Tokyo.
403

Four days before that peak, a new Bank of Japan governor named Yasushi Mieno raised the official discount rate to 4.25%, the fourth hike in a cycle that had started off a 2.5% floor. He kept going. By August 1990 the rate was 6%. He also went at the property lenders directly through window guidance, ordering the banks to stop feeding the land market.

It worked.

The Nikkei was near 20,000 within ten months. It reached 14,438 by August 1992, and it kept going down in fits for another decade. Urban land fell over 80%. Companies that had borrowed against their headquarters to buy more headquarters saw their collateral simply evaporate. And the banks loaning to them all were left holding a whole bunch of nothing.

From 1991 to 2003 the Japanese economy grew at ~1.14% a year. Real wages fell around 11%. The country slid from second-largest economy to fourth. And the Nikkei did not see 1989 again until February 2024.

34 years. If you were a 30y old lad in 1990, you would spend your entire working life inside the aftermath.

You would have watched your apartment go underwater and stay there till after retirement.

You would have learned that the safest thing was cash and government bonds (and a minority: precious metals). That prices only fell rather than rose, and above all else that the man who raises interest rates is the man who ends the world.

THAT lesson is why the policy rate spent the past three decades pinned at the zero boundary, and why QE became permanent rather than “temporary”, and why the central bank ended up owning half the government bond market. Even without anyone declaring a formal crisis.

Well, the Japanese did it for decades, so why can’t the rest of us?

For that answer, we’ll have to dig. Find out how the machinery works.

Let’s say you want to borrow 100 million yen - which by the time you’re reading this can probably buy you a lollipop at DollarTree - you can borrow that at effectively nothing.

You turn around, sell those yen, and buy dollars, and buy a US Treasury paying 4.5%. Neat income.

Now comes the financial engineering - namely margin (leverage) - because just look at that spread… it’s quite small. But let’s multiply it 25x (before ‘11 it went even to 100x) and you’ll get a yield you could get out of bed for.

THAT there, dear readers. THAT is the carry trade. And for 30 years it was the closest thing in finance to a free lunch.

Underlying assumption: the yen you eventually have to buy back doesn’t cost more than the yen you sold. Whoops.

No1 knows how big this pile is.

Estimates run from $261 billion at the polite end to $8 trillion at the hysterical end. MS goes for $500 billion and most macro people I read land near $2 trillion.

It’s so opaque because this is not really a trade, but a reflex taught to traders over 30 years. It’s instinctive. It’s so ingrained in the modern world of finance that if there’s a hiccup somewhere in Japan, the whole world feels it. [August ‘24 enters the chat]
USDJPY & VIX

Think insurers, pension books, hedge fund basis positions, structured products, corporate treasuries and a few hundred thousand (Japanese) retail FX accounts. Taught for 30 years that there IS a free lunch.

So when the BOJ unexpectedly raised interest rates to 0.25% in the summer of ‘24, the world got an acute episode of fuck-where-is-my-money-gone.

Now everyone even slightly familiar with finance understands that when you need to pay MORE for something (for example for a ¥), that it strengthens the value of it. Now, if you raise the interest rate, you strengthen the yen. Strengthening the yen kills that trade. Because your funding currency (yep, I keep repeating it: the yen) appreciates, your loan gets more expensive in the currency your assets were bought in (mostly the USD).

So you - alongside your fellow insurers, pension books, hedge fund, corporate treasuries and a few hundred thousand (Japanese) retail FX accounts - want to reduce your exposure so you sell the asset and buy back the yen.

Which in turn strengthens the yen. Which forces the next insurer, pension book, hedge fund, structured product, corporate treasury or one of the hundred thousand (Japanese) retail FX accounts to do the same.

August 2024 was the demonstration.

A 15 basis point hike (0.1% → 0.25%), and the Nikkei fell 12.4% in a single day with the VIX above 60.

So keep the yen weak and the trade lives forever.
That was more or less the plan.

Japan buys its energy in dollars and as the yen falls, the same barrel costs you more yen, so Japan can either print more yen to buy the dollars to buy the oil or it can sell reserves to get the dollars.

Printing accelerates the fall.

Selling reserves means selling US Treasuries, which lifts US yields, which widens the differential, which pulls more money into the trade right as volatility is making it unholdable.

Leveraged positions are fine in calm waters. But once you start to rock that particular boat, there’s nowhere there’s any calm left.

And there’s the third - strange - one.

Raising rates should support a currency. But in Japan, it does the opposite.

Consider the government’s debt. It sits above 250% of GDP, so a higher coupon means a bigger interest bill, which is paid by issuing more bonds, which the Bank of Japan ends up absorbing because there’s No1 that can buy at that size.

Which is the whole trap in just that one statement.

Hike? You break the bond market, the regional banks and your own budget.

Don’t hike? The currency keeps sliding while every imported calorie and litre of fuel gets more expensive.

There simply ain’t more road to kick the can. No painless solution anymore. So in good tradition, Prime Minister Takaichi’s answer so far has been … to spend more on top of all the debt that caused it in the first place.

Plus a food consumption tax cut to 1%.

The political equivalent of putting a welcome mat over a sinkhole.
For once, the sun might set in the East
For once, the sun might set in the East
No1
·
6 December 2025
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Last December, I argued that Japanese yields were the most important chart in global finance and that almost nobody in Western media had noticed it.

Oh boy, do they NOW?!

On 23 July, the yen hit 163.99 to the dollar, the weakest since 1986. Forty years.

On the 30th, the day before its own policy meeting, the BOJ went into the market, which is a bit like calling in an airstrike the night before your ceasefire vote [Trump enters the chat].

That crimson orgy last Thursday cost roughly ¥8.45 trillion, near $53 billion in a single session, the largest one-day intervention Japan has EVER run.

And because red is the new black, they repeated it on Friday for a measly ¥5.3 trillion ($34 billion, but who’s counting still?).

Give or take $90 billion in two days.