At $104-111 per barrel and gold at $4,679, the dominant narrative of 2026 writes itself: a Middle East in flames, an inflation pipeline that refuses to drain, and a Federal Reserve trapped between two impossible choices. It is a compelling and largely correct story. But financial crises rarely detonate where everyone is watching. The more interesting question, and the more dangerous one, is what is accumulating in the shadows of that consensus. The answer is the yen.
USD/JPY at 160.16 is not simply a data point about two exchange rates. It is a barometer of global risk appetite measured in leverage. The yen carry trade, borrowing in low-yielding Japanese yen to fund positions in higher-yielding assets ranging from US Treasuries to Brazilian reals to Bitcoin, is among the largest and most structurally embedded flows in global finance. When it unwinds, it does not unwind gently. The episode of August 2024, when a modest Bank of Japan rate adjustment sent USD/JPY falling eight figures in a matter of days and erased trillions in global equity market capitalisation within 72 hours, is the recent template. Today's conditions are, by most measures, more stretched.
Why the Pressure Is Building
The arithmetic is straightforward. The BOJ's policy rate sits at 0.50%, against a Fed funds rate of 4.25-4.50%. That 375-400 basis point differential is the engine of the carry. For as long as the Bank of remains the world's last major central bank holding rates near zero, the trade is self-reinforcing: each week of stability draws in more borrowed money, which compresses yen volatility, which makes the trade look safer, which draws in more borrowing still.
Get analysis like this delivered daily. No account required.
This analysis was produced by the Convex Research Desk from live economic data and is for informational purposes only. It does not constitute financial, investment, or legal advice. See our editorial standards and terms of service.
Convex combines institutional macro research with AI-powered signal generation. Access live trading signals, portfolio analytics, and strategy backtests.
But the BOJ's tolerance for USD/JPY above 160 is historically thin. Japanese policymakers have intervened, verbally and materially, at precisely these levels before. The Ministry of Finance spent roughly ¥9.8 trillion ($65bn) in intervention operations in 2024 to defend similar levels. More critically, domestic Japanese inflation, running above target for over two years, has not gone away. Core CPI in Japan printed at 2.6% in February 2026. The BOJ raised rates in January to 0.5%, a level not seen since 2008, and Governor Ueda has consistently refused to rule out further moves. An unscheduled hike or a coordinated verbal intervention at a G7 meeting, both well within the probability distribution at current exchange rate levels, could trigger what traders call a 'vol event': a rapid, nonlinear unwind of borrowed yen short positions globally.
The macro team assigns a 10-15% probability to a BOJ unscheduled action over the next four weeks. That sounds modest until you consider the damage function. A USD/JPY move of eight to twelve figures, entirely consistent with August 2024 precedent, would force margin calls across the carry complex. The sequence would be: yen appreciates sharply → leveraged longs in US equities, EM bonds, and credit products are forcibly unwound → credit spreads gap wider → equity volatility spikes → risk assets sell off in tandem.
The Contagion Map
The transmission channels are not abstract. Begin with US equities. The CFTC net short in ES futures stands at -77,843 contracts, a heavily crowded position. Paradoxically, a yen-driven risk-off event would initially be ambiguous for equity direction: the carry unwind creates forced selling of risk assets, but the existing short positioning could produce a violent short squeeze as both sides scramble. The net effect, based on historical analogues, tends to be a sharp initial sell-off followed by an equally sharp but short-lived bounce, ultimately resolving lower as the fundamental stagflation thesis reasserts.
For credit markets, the picture is cleaner and more alarming. High-yieldOAS at 3.28% and investment-grade spreads at 87 basis points are pricing a world of modest stress, not a world of geopolitical conflagration and carry-unwind risk. BAA-10Y spreads at 1.75% and AAA-10Y at 1.15% represent a credit market that is, in the blunt assessment of the data, far too complacent. A carry unwind of meaningful size would widen HY spreads by 80-120 basis points within days, repricing the entire risk complex in a way that oil prices and CPI readings have, so far, conspicuously failed to do.
Bitcoin and crypto assets, popular carry-funded positions during low-volatility regimes, would likely see the sharpest percentage drawdowns in any disorderly yen move, given their sensitivity to global liquidity conditions and the exhaustion of the RRP facility as a marginal liquidity source.
Gold Wins Either Way
The elegant feature of gold's position in the current regime is its robustness across the yen scenario tree. If the BOJ stays on hold and USD/JPY drifts higher, gold continues to benefit from dollar debasement fear, inflation preservation, and geopolitical premium. If the BOJ acts and the carry unwinds, gold initially faces selling pressure as carry-funded longs are liquidated, exactly what happened in August 2024, when gold briefly dipped $80 intraday, before rapidly recovering as the risk-off safe-haven bid reasserts. The structural central bank demand floor, running at roughly 1,000 tonnes annually since 2022, provides a bid that purely speculative assets cannot replicate. Gold at $4,679 has confirmed this thesis for 18 consecutive weeks; a carry-unwind event would likely prove a buying opportunity, not a regime change.
What to Watch
The triggers are specific and monitorable. USD/JPY crossing 163-165 is the most important technical level, it is at that zone that Japanese policymakers have historically moved from rhetoric to action. Watch for Ueda's language at any upcoming BOJ communications; any softening of the phrase 'gradual and cautious' with respect to rate rises should be treated as a hawkish signal. The spread between 10-year JGB yields (currently near 1.50%) and US 10-year Treasuries at 4.33% is also worth tracking: any compression of that differential narrows the carry incentive and reduces the trade's attractiveness before the BOJ even acts.
The broader lesson is one of regime interaction. The stagflation thesis, built on oil, inflation breakevens, a trapped Fed, is correct and well-understood by sophisticated investors. Precisely because it is well-understood, the next major volatility event is more likely to arrive from a direction that consensus has underweighted. At 160.16, Tokyo is quietly winding a spring that, when released, will be felt in Chicago, London, and São Paulo alike. The Strait of Hormuz may be the headline risk. The yen is the sleeper.