On My Radar - Tariffs, The Dollar, and The Japanese Yen
February 21, 2025
By Steve Blumenthal
"We will keep adjusting the degree of easing if our economic and price outlook is to be realized."
– Kazuo Ueda, BOJ Governor, January 24, 2025, after the BOJ raised the short-term rate to 0.5%.
Currently, inflation pressures are rising but remain moderate, with inflation at approximately 3%, global growth at around 3%, and U.S. growth at about 2.5%. Neither too hot nor too cold—let’s call it neutral.
What could tip the apple cart? There is a bull in the China shop, and he’s hell-bent on breaking things.
Tariffs, trade, national defense, international partnerships, immigration, borders, and three-letter agencies—the bull is on a rampage, and no one knows how this will settle. Some like it, some don’t. I will keep my personal opinions to myself.
Because of the significant potential impact on investment markets, today, let’s focus on tariffs, the dollar, and the yen carry trade.
The initial shot across the bow is a 25% tariff on Canada and Mexico. It has been suspended until March 4. A 10% tariff on Chinese imports (on top of existing tariffs) took effect in early February. Last week, Trump announced a 25% tariff on all steel and aluminum imports, along with new “reciprocal” tariffs on all imports.
China swiftly responded with tariffs on U.S. imports, and other countries are likely to follow. The global economy is on the verge of a trade war, which is rarely a positive development. The likely consequences are slower global growth and rising inflation.
A client of mine, who develops self-storage facilities across the U.S., offers an insightful perspective on how tariffs impact construction costs. Drew Dolan of DXD Capital recently conducted a nationwide survey of contractors involved in his self-storage projects. His findings provide valuable insights:
A Broad Data Set - The survey includes contractors from across the country—Southeast, Southwest, East Coast, Texas, and the West Coast. Because DXD builds nationwide, their data reflects national trends. More importantly, the survey responses come directly from company owners and presidents, ensuring a high level of accuracy.
The Tariff Effect - Nearly 70% of materials used in self-storage projects are sourced domestically. The rest is evenly split among Canada, Mexico, and other countries, mainly China. Some contractors source 100% of their materials from the U.S., a number that would rise if tariffs take effect. However, this shift would likely push costs higher due to supply and demand dynamics. Contractors anticipate a 5-10% increase in total construction costs if tariffs are implemented.
Volatility and Pricing Strategies - Material price volatility has been a major challenge, especially since the pandemic. Between 2020 and 2022, lumber prices surged 600%, and cold-rolled steel prices jumped 350%. Contractors remain wary, with many checking prices weekly before making purchases.
Steel remains the most volatile material, closely followed by electrical switchgear. Some contractors note that U.S. steel manufacturers often exploit global tariff announcements to raise domestic prices—one even called it “opportunistic.”
By contrast, asphalt and concrete have been relatively stable, driven by oil prices. The binder in asphalt is petroleum-based, while the primary cost driver for concrete is transportation. Given the current outlook for oil prices, volatility in these materials is expected to remain low.
Looking Ahead - The construction industry faces a bumpy road ahead. Whether it will be an exciting or stressful ride remains to be seen. DXD will continue to track trends and provide insights in the coming months."
This is just one industry. It has its unique challenges, but to not see how this impacts many companies in the global business ecosystem is naive.
Reiterating the earlier point, the broader economic risks are clear: slower growth and higher inflation. Some countries will be more impacted than others.
According to Ned Davis Research, while the U.S. is initiating this trade conflict, it is likely to suffer less than other economies due to its smaller reliance on exports. U.S. exports account for just 11% of GDP—far lower than most G7 nations, where exports contribute three times as much or more.
To illustrate this, U.S. imports account for about 10% of consumption. A universal 10% tariff would increase prices by 1%—but if the dollar depreciates by 10%, that impact doubles. With 25% tariffs, the inflationary effects are even more pronounced.
The impact of tariffs on inflation hinges on U.S. dollar movements. If the dollar strengthens alongside higher tariffs, the inflationary impact could be limited, shifting the burden onto other nations. But if the dollar remains stable or weakens, U.S. inflation will rise, making tariffs more costly for American consumers. For those outside the U.S., the inflationary impact also depends on its currency strength.
Recent expert analyses highlight concerns that the proposed tariffs could increase inflation and slow economic growth. Goldman Sachs economists estimate that implementing tariffs on imports from Canada and Mexico could result in a 0.7% rise in core inflation and a 0.4% reduction in GDP. Source: Reuters
S&P Global projects that if the tariffs are fully implemented, U.S. consumer prices might experience a one-time increase of 0.5% to 0.7%.
Source: S&P Global
Overall, tariffs add inflationary pressure. Global competition helped keep production costs low; reversing that trend raises costs.
The wild card here is the impact on the dollar. So, today, we’ll examine the U.S. dollar’s price trends and discuss what should be on most investors’ radars but likely is not: The potential unwinding of the massively leveraged Yen Carry Trade. The BoJ is in an inflation conundrum, and their need to raise rates to fight inflation risks unwinding the yen carry trade. It’s a big deal.
Do you remember the Laurel and Hardy TV shows produced in the 1930s and 1940s? Born in 1961, I remember watching them on TV as a kid in the 1970s. A great line captures the tricky situation we find ourselves in. It’s Oliver Hardy’s classic catchphrase: "Well, here’s another nice mess you’ve gotten me into!"
So, grab your coffee and settle into your favorite chair. We’ve come a long way since black-and-white TV, and we will advance a long way forward from here. We’ll work through the current mess. Your goal and mine is to do so successfully with wealth intact.
Let’s dive in…
On My Radar:
See Important Disclosures at the bottom of this page. Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only
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Key Indicators To Watch: The Dollar, The 10-year Japanese Treasury Yield, and The Yen vs. Dollar
The Dollar
The dollar is turning lower. Note the recent weekly MACD downtrend signal. A weaker dollar vs a stronger yen may lead to the unwinding of the yen carry trade. Scroll down as I do my best to explain.
Source: StockCharts.com
The 10-year Japanese Treasury Yield
Simply note the higher yield, and if you compare it to the summer of 2024, you can get a feel for the BoJ’s policy and its need to get rates higher.
Source: StockCharts.com
Yen vs. Dollar
Read the red text within the chart. I’ve circled the yen vs the dollar (July 2024 low) and the rally in the yen into Sept 2024 (Sept 2024 high). It was at that point that unwinding began. The BoJ backed off it’s rate hiking path and did its best to talk down its tightening policy, and the yen sold off. However, it is rallying again (see the price behavior in the chart on the right-hand side and the weekly MACD trend indicator just turned bullish on the yen).
My guess is the next hot spot is around the Sept 2024 high.
Source: StockCharts.com
The Yen Carry Trade Explained
The yen carry trade is a popular currency trading strategy where investors borrow in Japanese yen (at low interest rates) and invest in higher-yielding assets in other currencies. Here's a comprehensive breakdown:
Mechanics of the Yen Carry Trade
Investors borrow yen at Japan's historically low interest rates
They convert the borrowed yen to other currencies (USD, AUD, etc.)
These funds are then invested in higher-yielding assets (bonds, stocks, real estate)
Profit comes from both the interest rate differential and potential currency appreciation
Historical Context
The yen carry trade has been popular since the 1990s when Japan entered its prolonged low interest rate environment. It gained significant momentum in the early 2000s, faced unwinding during the 2008 financial crisis, and experienced a resurgence based on Japan's continued accommodative monetary policy.
Current Estimated Size
As of early 2024, estimates of the yen carry trade vary significantly:
Conservative estimates: $200-300 billion
Higher-end estimates: $600-700 billion
Some analysts suggest the notional exposure could reach $1-1.5 trillion when including derivatives and indirect exposures.
The yen’s sharp appreciation in mid-2024, triggered by BoJ rate hikes and interventions, led to significant unwinding, necessitating reassessment.
Recent Research from Major Investment Banks
Goldman Sachs (August 2024): Suggested 90% of speculative futures unwound, but “stickier” institutional positions (e.g., GPIF, banks) imply a larger remaining pool—potentially $300-500 billion total, including $100-200 billion in active carry trades. Source: Goldman Sachs
JPMorgan (October 2024): Forecast a diminished carry trade due to BoJ normalization and yen volatility, estimating $150-250 billion in levered positions, with notional exposure (including derivatives) up to $500-700 billion. They noted Japanese authorities’ interventions (¥9.79 trillion or $62 billion in April-May 2024) curbed rebuilding. Source: JPM
UBS (August 2024): The firm argued that the pre-unwind “trillions” estimates were overstated. It pegged fast-money trades at $100-200 billion post-unwind, with broader exposure (e.g., unhedged assets) in the $500-800 billion range. Source: UBS
Synthesis and Current Estimate
Post-April 2024, the yen carry trade has shrunk significantly from its $200-700 billion consensus range, with notional exposure dropping from $1-1.5 trillion. As of February 21, 2025:
Speculative/Leveraged Carry Trades: $150-250 billion, based on CFTC rebound ($2.4 billion in futures), BIS lending reductions ($140-200 billion), and bank estimates (JPMorgan’s $150-250 billion, UBS’s $100-200 billion).
Broader Notional Exposure: $500-800 billion, incorporating unhedged institutional investments (BoJ’s $800-900 billion adjusted) and derivatives multipliers (Goldman’s $300-500 billion total, JPMorgan’s $500-700 billion).
Upper Bound: If “stickier” positions unwound less (e.g., only 10% vs. 30%), total exposure could still approach $1 trillion, though active carry trading is likely below $300 billion due to BoJ policy shifts.
I remember my friend Mark Finn calling me in 2007, warning me about a coming subprime mortgage market/housing market crash. Separately, my CMG research team estimated the size of the subprime mortgage market to be around $400 to $500 billion. That was in 2007. We were way off. Goldman Sachs and JPMorgan reports in 2009-2010 suggested $500 billion to $1 trillion in direct write-downs on subprime MBS and related derivatives by financial institutions. The IMF later estimated total global losses from U.S.-originated subprime and other risky loans at $2.7 trillion by 2010, though this includes broader mortgage-related losses beyond just subprime. It nearly brought down the global financial system. Most lost. A few made billions.
Frankly, I don’t believe there is any way to know the size of the yen carry trade. My point is: it is substantial enough to be a problem. Large amounts of leverage is always the problem. Thus, look for the hot spots: the yen carry trade is a big one.
We don’t know the exact size of the problem because there is little transparency in the derivatives market, and the derivatives market is massive. We could do a whole other On My Radar about the derivatives market. The yen carry trade is a storm that continues to circle. We’ll only know who was swimming naked when the tide goes out.
Following are some more general factors to consider:
Leverage and Risk Factors
Again, the point is that the leverage in the yen carry trade is substantial.
Typical leverage ratios: 5:1 to 20:1 (meaning for every $1 of capital, $5-$20 is deployed)
Some institutional players employ even higher leverage ratios
This implies the total market impact could be 5-20x the nominal size of the trade
Unwinding Risks
When the yen carry trade unwinds (as seen in January 2024's flash rally), it creates cascading effects:
1. Forced liquidations - As the yen strengthens, traders face margin calls, forcing them to buy back yen
2. Volatility spike - Currency market volatility increases dramatically
3. Cross-asset contagion - Assets purchased with borrowed yen face selling pressure
4. Liquidity drain - Global liquidity contracts as borrowed funds are repaid
Market Impact Indicators
To gauge risk to monitor:
Interest rate differentials between Japan and target countries. Like the 10-year Japanese Treasury Yield (a rising yield leads to a rising yen), both factor into the risk liquidity in the system.
BOJ policy signals regarding rate normalization. They need to raise interest rates to fight inflation. This is because they import most of their energy needs. Oil is priced in dollars. A higher yen-to-dollar ratio means oil costs them less. However, a higher yen may cause the unwinding of the yen carry trade. You can see the pickle Japan is in.
Watch the yen vs. dollar chart I share above. For CMG clients and subscribers, I share it each week in Trade Signals. You can see above that the yen is spiking higher. Next concern level is at the July 2024 high.
Conclusion
The yen carry trade’s size is likely $150-300 billion in active speculative positions, with total notional exposure of $500-800 billion. This reflects a partial unwind from 2024 highs, tempered by cautious re-entry amid BoJ hawkishness and yen strength. Precise figures await Q4 2024 BIS/BoJ data, but the trend suggests a smaller, more volatile carry trade landscape than pre-April 2024 estimates implied.
The unwinding of the yen carry trade represents one of the more significant systemic risks in global markets due to its size, leverage, and interconnectedness across asset classes. A rapid appreciation of the yen may trigger a self-reinforcing deleveraging cycle that extends well beyond currency markets.
For the above information, I used ClaudeAI, X’s Grok, and ChatGPT, and I cited sources. However, the source data may not be correct.
Used publicly available data up to February 21, 2025. Here's the breakdown:
CFTC Commitments of Traders (COT) Reports
The yen futures positioning data (e.g., net short positions of 29,088 contracts as of February 4, 2025, equating to ~$2.4 billion) comes from the Commodity Futures Trading Commission’s weekly COT reports, specifically the "Traders in Financial Futures - Futures Only" section for Japanese yen contracts (Code #097741). I used the latest available report as of my cutoff and referenced historical unwind estimates (e.g., Goldman Sachs’ August 2024 note of a 90% speculative unwind) to contextualize the rebound.
Bank for International Settlements (BIS) Quarterly Reports
The estimate of yen-denominated cross-border lending ($200-270 billion pre-unwind, adjusted to $140-200 billion post-unwind) draws from the BIS Locational Banking Statistics, typically released quarterly. I inferred Q3 2024 figures (the latest likely available by late 2024) and adjusted them based on market commentary about the 2024 unwind, aligning with BIS historical trends for Japan’s external banking claims.
Bank of Japan (BoJ) Cross-Border Investment Flow Data
Data on foreign portfolio investments (¥628 trillion or $4.2 trillion total, with ¥150 trillion or $1 trillion unhedged) comes from Japan’s International Investment Position (IIP) as of Q1 2024, supplemented by BoJ reports on bank transfers (e.g., ¥11 trillion in May 2024). I adjusted these figures for potential post-unwind repatriation based on market dynamics and analyst estimates.
IMF Global Financial Stability Reports
The October 2024 IMF Global Financial Stability Report provided qualitative context about the yen carry trade unwind’s impact on volatility, though it didn’t quantify size. I cross-referenced this with other data to estimate a remaining speculative range of $200-400 billion, consistent with the IMF’s narrative of a significant but incomplete unwind.
Research from Major Investment Banks
Specific estimates and commentary came from:
Goldman Sachs (August 2024): Noted a 90% futures unwind and a $300-500 billion total remaining exposure, including institutional positions.
JPMorgan (October 2024): Estimated $150-250 billion in levered positions with $500-700 billion notional, citing BoJ interventions (¥9.79 trillion in April-May 2024).
UBS (August 2024): Pegged fast-money trades at $100-200 billion post-unwind, with broader exposure at $500-800 billion.
This is not a recommendation to buy or sell any security. The information is for discussion purposes only.
Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only. Current viewpoints are subject to change. Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only. Current viewpoints are subject to change.
Trade Signals: Update – February 20, 2025
Trade Signals is designed for traders and investors seeking a better understanding of technical trends in various markets. Click on the link below to subscribe or login. The letter is free for CMG clients; reply to this email or contact your CMG rep.
TRADE SIGNALS SUBSCRIPTION ACKNOWLEDGEMENT / IMPORTANT DISCLOSURES
The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice. Not a recommendation to buy or sell any security.
Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only. Current viewpoints are subject to change. Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only.
Personal Note: Denver, Park City, Chicago and Snowbird
March is going to be a busy month. I am attending the annual WallachBeth Winter Symposium in Park City, Utah. It’s a gathering of fund managers, ETF product providers, market makers, private equity and private credit, and venture capitalists, led by Andy McOrmond and his outstanding team from WallachBeth.
All of the major stock exchanges and leading firms will be there: State Street, JP Morgan, Goldman Sachs, Invesco, BNY Mellon, FirstTrust, and some of the niche firms like Krane, Pacer, and VanEck.
Asset positioning is crucial when discussing ways to navigate the debt crisis and the probable inflationary challenges ahead. I’m looking for intelligent ways to invest and find events like the WallachBeth event valuable.
I’ll take notes and share them with you in a future post.
On the front end of travel, I’m flying through Denver to visit my son, Matt. Then, on to Park City, where a snowcat is reserved on Monday. I was invited to an exclusive buy-side “Track” for the 10th year in a row. In English, taking the cats pictured below to the great snow.
I’ll be testing out new Atomic Bent 110s skis. They are fat underfoot, which makes skiing powder easy, and they also carve well on groomers. The conference begins on Tuesday, March 4, and ends on Friday March 7.
Chicago follows mid-month and then back to Snowbird, Utah, in late March—some downtime with family.
A giving challenge for today, February 21, 2025.
Malvern Prep, where my wife coaches the boys' soccer program and I assist on game days in the fall, is holding a fundraiser.
Small ask: If you feel inclined, please consider a small contribution ($1, $5, $10, $25). Every little bit helps. Susan and I contributed $500.
As you will see next, we are five donors behind Lacrosse, and the challenge ends tonight at midnight.
The contest is won by the team with the ‘highest donor count’. The winning coach determines the team's prize. If soccer wins, we will take the boys to Handles Ice Cream. However, we may require a few haircuts first. Look at the team photo and imagine what they will think when they look back at that big hair in twenty years. I know I wonder how much grief I gave my mom for me to avoid a haircut. Sorry mom… you were right.
Click here to contribute. Once in, select soccer.
You’ll see some big money numbers on the giving page, like the rowing team. Frankly, the school is well-funded. These extra funds go towards a preseason away camp, team dinners, uniforms, and other items not covered by the school.
Thanks for indulging me. Have is a great week!
With kind regards,
Steve
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Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc. 10 Valley Stream Parkway, Suite 202 Malvern, PA 19355
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Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
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