There’s disarray, and then there’s 2025. But even by this year’s standards of financial bedlam, the last few days managed to leave most desks blinking.
The yen collapsed. The dollar rallied. Gold went vertical. France flinched. And hedge funds, which had finally found peace betting on a soft dollar, hard gold, and gently strengthening yen, suddenly remembered what real volatility feels like.
Japan, ever the quietly dangerous mover, flipped the script when Thatcherite Sanae Takaichi smashed the glass ceiling and got in line to be the country’s first female prime minister – setting up a US-style confrontation with the central bank over interest rates.
Markets were expecting a mildly reformist continuation after the leadership shuffle. What they got instead was a clear mandate for more fiscal expansion and, possibly, even less urgency at the Bank of Japan. That alone was enough for the yen to break lower, fast.
Enter: the resurrection of the yen carry trade.
Suddenly, the name Mrs Watanabe was back in the financial press. Originally, a nickname for Japan’s middle-class housewives who actively traded foreign exchange markets from their homes to generate yield, she became a symbol of retail sophistication and discipline during the golden carry era of the early 2000s. Now, in a world desperate for stable arbitrage, her legacy is getting another run.
And for good reason. The risk-on crowd, starved for yield, recently whipsawed by gold’s erratic rally, and ambushed by Trump’s tariff reruns, needed something – anything – that still made structural sense. The carry trade, at least, offered a framework.
Borrow in yen. Invest in anything with a pulse that pays. For a world living off basis points, that’s a lifeline.
Ironically, the dollar’s recent bounce, while also part of the same script, was not about strength but survival. For months, the greenback had been slowly deflating. Fed credibility was fading, Trump’s return brought dollar-bashing populism back into vogue, and safe-haven flows were increasingly heading into bullion.
But this week, everything changed – not because the dollar became more attractive, but because the alternatives looked worse.
The euro took a hit as French political nerves rattled investors. The kiwi collapsed after an oversized rate cut. And the yen, once considered this cycle’s undervalued gem, broke technical levels with alarming ease.
What followed was a violent scramble: shorts on the dollar got squeezed, longs on the yen got crushed, and the unwind triggered a sharp repositioning across FX desks. Risk reversals swung in favour of the dollar for the first time in months.
Momentum models tripped over themselves. Real money accounts suddenly started talking about relative fiscal stability in Washington – even in the middle of another shutdown drama.
Amid this, gold soared to $4,000. ETFs saw record inflows. Talking heads predicted new paradigms. And the same newsletters that warned of gold’s volatility last month now couldn’t print bullish targets fast enough.
It wasn’t just the US shutdown. It was the broader market mood: nervous, jumpy, twitchy to any headline. Central banks were cutting. Wars weren’t ending. Debt burdens were rising. No one believes inflation is dead, yet rates are falling anyway. Gold, in that context, doesn’t need to explain itself.
Still, as the odd analyst and columnist took pains to remind this week, gold is a terrible hedge if you actually care about timing. It’s erratic, it doesn’t pay, and its rally is often more about fear than fundamentals. When the music stops, it can drop just as sharply as it rises. And good luck using RSI overbought signals to pick a top when narrative momentum is doing the driving.
So where does that leave capital?
Equities are expensive. Bonds are dislocated. Crypto is, well, crypto. And gold, while comforting, looks technically stretched. That leaves the old workhorse of global liquidity – the yen carry – as the best bad idea available.
It’s not just retail. Professional flows are already moving. Swap spreads suggest real interest. Implied vols are still manageable. And as long as the BOJ stays anchored while everyone else stumbles, there’s reason to believe the trade has legs. Of course, it won’t last forever.
Trump’s tariffs will eventually feed back into inflation. The Fed might blink again. And Japan, for all its passivity, has a habit of surprising when markets least expect it. But for now, the trend is the friend.
In a topsy-turvy world where the safe haven is – at least occasionally – the dollar, the inflation hedge is a zero-yield metal, and the best alpha comes from borrowing Japanese money to punt Brazilian debt, cynicism may be the most rational strategy of all.
As for Mrs Watanabe, she never really left. She was just waiting, patiently and quietly, for global central banks to make chaos great again.
And they have.
Copyright Business Recorder, 2025
The writer can be reached at [email protected]
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