- Reader Case: From Cancer Survivor to FIRE - September 1, 2026
- The FIRE Guide to America’s Health Care System (2026) - July 7, 2026
- Planting Your Money Trees - February 23, 2026
Last week, stock markets looked like they were on the edge of teetering over the abyss, as stocks plunged in multiple stock exchanges around the world.
The Japanese Nikkei 225 index tanked more than 12% on Monday, marking its worst performance since 1987. The S&P 500 sank more than 3% and shed $1.3 trillion in value, notching its worst day since the 2022 bear market. The Dow lost 1,000 points that same day, and the Nasdaq Composite ventured further into correction territory. All three major indexes ended the week lower.
Markets saw a massive shift this week. Here’s what happened. CNN.com
At first glance, this seemed to be caused by a less-than-stellar jobs report, showing that the US added 114,000 jobs in July. That doesn’t sound so bad, but economists were expecting 175,000, plus unemployment ticked up slightly from 4.1% to 4.3%, so it raised fears that the economy was starting to slow down and that the soft landing may not be looking so soft after all.
That was part of what happened, but behind the scenes lurked another, more interesting story.
It’s called the yen carry trade, and like most bad financial ideas, it involved a whole lot of leverage. Here’s how it works.
Japan’s economy has long been plagued with anemic growth, owing to a declining workforce hampered by low birth rates and anemic immigration, and to stimulate their economy, the Japanese central bank has kept their interest rates at or near zero for decades.
This seemingly created an arbitrage situation, where investors could borrow Japanese Yen for next to nothing, convert it to another currency, and then invest it in something. If conditions remain relatively stable, then this trade just seems like free money. Borrow as much as you possibly can from the Japanese, dump it into US stocks, and pocket the difference.
The problem of course, is that this involves leverage, and leverage is never risk-free.
The US employment report was the trigger that made traders jittery. Those jitters sent stock markets down, as well as increasing the belief that the US Federal Reserve would start cutting interest rates faster. At the same time, the Bank of Japan decided to start raising interest rates. This changed the relative attractiveness of both currencies, and the USD/JPY exchange rate suffered, reflecting an all-of-a-sudden stronger yen. All of a sudden, this trade didn’t make sense anymore. And that’s when bad stuff happened.
The initial reaction to the unemployment numbers sent stock markets down. That combined with the exchange rate moving in the wrong direction caused a whole lot of traders who were employing this strategy to go deep into the red. And because this entire strategy is powered by borrowed money, lenders panicked and issued margin calls, which forced over-leveraged traders to sell their positions to pay back their loans. This caused stocks to fall even further, which put even more traders into the red, which caused more margin calls, and so on and so on in a vicious loop.
This is what caused a somewhat negative, but hardly catastrophic, jobs report to spiral into the Dow experiencing their worst trading day since 2022. Interestingly, Japan’s stock market index the Nikkei 225 experienced their worst trading day since 1987, dropping 12% in one day, and now we know why.
There is no such thing as good debt
So why am I telling you this? Two reasons.
First of all, this is an excellent example that shows why debt is such a dangerous tool. This yen carry trade was pitched to me by investment advisors years ago, and I’m so glad I said no back then. Whether you’re using it to buy a house or to invest in speculative stocks, borrowing money seems like a great idea until things turn against you.
Interest rates change over time. That much should be obvious to everyone by now. Yet every investment strategy that involves leverage assumes that the interest rate they can get now will remain substantially the same forever.
“Oh, they’d never raise interest rates,” they say. “Too many people would get hurt.”
Central banks don’t raise interest rates because they want to hurt people. They do it in response to some unexpected event, and the cost of not doing anything would hurt more people. Nobody expected a global pandemic would cause 10% inflation, yet it happened. Global events forced their hand.
And guess what? When interest rates move in the wrong direction, you’re caught in a stampede where everyone is rushing for the exits at the same time. That’s what’s happening to Canada’s condo market right now, and that’s what happened in this yen carry trade.
When you’re investing towards FIRE, you are, by definition, a long term buy-and-hold investor. And the big advantage that long term investors enjoy is that we have time on our side. We don’t have, for example, Wall Street analysts breathing down our necks to make money this quarter or we’re going to get fired. We can simply wait for markets to recover.
Leverage takes away your ability to wait. All of a sudden, control of your investments is handed over to some algorithm and you can be forced to sell investments at a loss against your will. Your money is yours and yours alone. Never give anyone else power over it.
Brace for more volatility ahead
The second reason I’m telling you this is because the effects of this yen carry trade are not done playing out.
It’s not obvious how widespread this trade was, but by some estimates between $500 billion and $1 trillion of borrowed money was involved, and only about 50% of that trade has unwound. That means that there’s likely more volatility lying ahead as the rest of this money gets repaid.
Some have said the yen carry trade amounted to less than $500 billion at its peak, while others have estimated that more than $1 trillion in assets could be exposed to carry-related risks. But everyone essentially agreed: more toothpaste remained to be squeezed from the tube.
Stocks still vulnerable to further unwind of yen carry trade, strategists say. Morningstar.com
If and when this happens, don’t panic. Job creation slowing down is not the same as job losses. In fact, slowing job creation is what the Federal Reserve is trying to engineer. A recession is defined as two consecutive quarters of GDP contraction, and so far the economy is still growing, by 2.8% in Q2, in fact.
So far, this is what a soft landing is supposed to look like.
So stay calm, stay invested, and above all else, stay out of debt. We’ll all get through this together.
Hi there. Thanks for stopping by. We use affiliate links to keep this site free, so if you believe in what we're trying to do here, consider supporting us by clicking! Thx ;)
Build a Portfolio Like Ours: Check out our FREE Investment Workshop!
Travel the World: Get flexible worldwide coverage for only $45.08 USD/month with SafetyWing Nomad Insurance
Multi-currency Travel Card: Get a multi-currency debit card when travelling to minimize forex fees! Read our review here, or Click here to get started!
Travel for Free with Home Exchange: Read Our Review or Click here to get started. Please use sponsor code kristy-d61e2 to get 250 bonus points (100 on completing home profile + 150 after first stay)!
Thank you so much for this article and providing further explanation. Always better to read your take on this than any kind of financial news which are already very alarmist.
Thanks so much – this is the only explanation I’ve understood! Appreciate you taking the time to do this.
Thank you so much for explaining this so beautifully!
I love being in the “no debt” crowd. I see so many people talk about not paying mortgages or buying multiple investment properties every day. It’s hard to avoid the FOMO and feel like you need to do the same. It’s times like these that make it feel really nice to have a paid off home and no car or student debt. It’s fun to watch people panic a bit.
Thanks for the insights. As a person who is situated in Tokyo and owns Japanese stocks, I saw my portfolio tank by 10%, however, it suddenly rebounded the next day. This brought some relief but as you said, the volatility with the yen carry trade is still not done. In one day, the yen strengthened from 149 yen to 144 yen. They called it the second worst drop in history right after Black Monday in Japan. The yen is still weak at 147 at the moment I am writing. We are long term investors but I was panicking hoping we could be FI in the next 5 years and RE my husband.
Why is it fun to watch people panic?
I agree that investing on borrowed money is very risky because the margin call will ALWAYS come when your investments are worth the least to pay the margin. It’s difficult strategy to win especially when interest rates are high (even if you can write off the interest).
That said, I also believe that leverage can enhance your returns. That’s why I invest in leveraged ETFs; typically with 25% leverage. Sure the MER is about 1% higher to cover the interest charges that the fund pays (which is lower than any rate a retail investor can get). And sure the fund manager is on the hook for any margin calls. But they are better equipped to handle it than you and I.
In the long term, if the underlying stocks make money the leveraged fund holding those stocks will make more money. For example, if a fund without leverage has a 10% return, the same fund with 25% leverage will make a 12.5% or closer to 11% after the fund pays the interest charges.
One caveat: it works against you in reverse too; in a declining market a 10% loss will amount to about a 14% loss of the leveraged fund plus the risk of the margin call the fund manager must deal with (but not you).
Great article…it explained the whole matter in layman’s terms. People relying on debt in order to make more money think they are smart…until they get punched in their mouth (as Mike Tyson once said). Its best to keep things simple. Eliminate debt or don’t carry any debt, minimize expenses, invest in index ETFs for the long term and maintain a good cash balance to handle emergency situations.
—
But didn’t the Japan stock market rebound right away the next day by 12%?
How do you explain that??
—
“This seemingly created an arbitrage situation, where investors could borrow Japanese Yen for next to nothing, convert it to another currency, and then invest it in something. If conditions remain relatively stable, then this trade just seems like free money. Borrow as much as you possibly can from the Japanese, dump it into US stocks, and pocket the difference.”
You make it sound too simple. You mean I could have borrowed Yen and just put in it in US savings accounts with 5% interest. Could an average investor do this on their ETrade account for stocks? How about currency exchange fee? There must be a catch. No?
Maybe once you have FIRE’d you should stay away from leverage but in accumulation phase I think you can actually use it to some extent. “Leverage for the Long Run” explains this very well. If your horizon is far enough away it actually makes sense to use it. Now rather than getting a brokerage account there are many double or triple leveraged ETFs to pick from that have it all built into the price.
If you have FIRE’d you would only use leverage if you have more than you know you will need in the future. Its the added volatility (effectively multipled by leverage) that scares most into not sticking to it.
Now I know you wont believe me so backtest 100% VOO vs 100% TQQQ from Nov 2023 to now. You need predetermined buy and sell criteria in place and stick to them.
Good overall observations. I wouldn’t necessarily say there is no good debt. While some consider student loan debt good debt, I don’t. Mortgage or business debt though, can enable people to use the banks money to create equity with a much larger entity, or create a livelihood that they couldn’t achieve themselves.
When evaluating online travel agencies, one common question is, is edreams reliable? For business travelers, reliability is crucial. eDreams, a prominent online booking platform, offers a wide range of services from flights to car rentals. However, the reliability of eDreams often depends on user experience and customer service responsiveness. While some users praise its convenience and competitive pricing, others express concerns about customer support and refund policies. It’s essential to research and read reviews before making any business-related bookings through eDreams.
IRT “No good debt”, I have to disagree. Debt obtained before a highly inflationary period is good. The inflation effectively reduces debt.
All good and nice but this story about “invest for the long term” is for young. Those of us in the 60 or 70’s, we don’t have long term anymore…I hate when these millennials say that….they will soon realize their long term is less than 10 yrs of life…then I’ll have my laugh and tell them to invest for the “long term” lol !
A strolling magician and walk around magician offer a unique and engaging experience for any event. Unlike traditional stage performances, these magicians mingle with guests, performing close-up magic that captivates and entertains on a personal level. Their interactive style ensures that every guest experiences the wonder of magic firsthand, creating memorable moments throughout the event. Whether at weddings, corporate gatherings, or private parties, a strolling magician and walk around magician can enhance the atmosphere with their charm and skill, making them a fantastic choice for any occasion.
If you’re wondering, can i buy eliquis in canada the answer is yes. Eliquis, a popular anticoagulant used to prevent blood clots and reduce the risk of stroke, is available in Canadian pharmacies. However, it’s essential to have a valid prescription from a healthcare provider before purchasing it. Many people choose to buy their medications in Canada due to the potentially lower prices compared to other countries. Make sure to consult with your doctor to ensure you’re getting the right dosage and treatment before you decide to purchase Eliquis in Canada.
@escape road: Very astute generalizations. I wouldn’t go so far as to claim that all debt is bad. I don’t think it’s good debt, even though other people do. Yet, with the right kind of mortgage or business debt, individuals can use the money from the bank to build equity with a bigger company or even start a firm that they wouldn’t have been able to start on their own.
This article is very interesting! I learned a lot about the market crash.
This breakdown really highlights how what looks like a simple economic headline can actually hide a much deeper chain reaction beneath the surface. The jobs report may have been the spark, but the yen carry trade was clearly the dry tinder that allowed fear to spread so quickly across global markets. https://bflix-to.com/
This article is a great reminder that what looks like a small economic hiccup can ripple into global chaos when leverage is involved. The yen carry trade story shows how debt, when combined with assumptions that markets will stay “stable,” can turn a minor signal—like a slightly weaker jobs report.
Last week’s crash is a powerful reminder that markets often break not because of a single bad data point, but because of hidden structural risks building up in the system. The weak U.S. jobs report may have been the spark, but the real fuel was the massive yen carry trade built on leverage.
What makes this crash so fascinating isn’t just the weak jobs report—it’s how something that looked “manageable” on the surface exposed a hidden web of risk underneath. The yen carry trade perfectly shows how markets today are less about fundamentals alone and more about interconnected bets built on cheap money.
This is a really solid breakdown of how something that seems “contained” — like a slightly weak jobs report — can cascade through the system when leverage is involved. The yen carry trade angle is especially important because it highlights how interconnected global markets are; a policy shift in Japan doesn’t stay in Japan when billions are borrowed and deployed elsewhere.
This is a really insightful breakdown of how something that seems relatively minor—like a slightly disappointing jobs report—can snowball into a major market event when combined with hidden systemic risks. The explanation of the yen carry trade is especially compelling because it shows how interconnected global markets are, and how quickly sentiment can shift when currency dynamics and interest rate policies change.
Privacy-friendly streaming is becoming more important, and it’s good that users don’t have to provide personal details to start watching their favorite content.
This post explains how interconnected global financial systems—like interest rate changes, currency shifts, and leveraged investment strategies—can rapidly amplify market volatility, especially when large-scale borrowing such as the yen carry trade unwinds unexpectedly.
A good reminder that leverage can amplify gains, but it can also turn a manageable market correction into a painful forced sell-off. Staying patient and focused on the long term is often the best strategy. rocket goal
I enjoyed going through this article because everything feels clear and easy to understand. I recently found cupcake puzzle game and liked the simple gameplay. Matching two equal numbers creates a bigger tile, and you keep repeating that process while trying not to fill the board. The colorful cupcake theme makes the familiar 2048-style mechanics feel a little more enjoyable. 🧁