The market is playing the reverse game again.

Recently, the US-Japan currency market trend has completely broken the textbook logic. Logically, with the US-Japan interest rate differential narrowing to its lowest since 2022 at 2.09%, and Japanese government bond yields soaring to 2.07%—the highest since 1997—conventional thinking would suggest the yen should explode. But what happened? The US dollar against the yen is actually getting stronger, leaving investors puzzled.

Why is this happening?

On the surface, it’s about the interest rate differential story, but fundamentally, it’s a debt panic. Japan’s debt has already reached 230% of GDP, a number that’s truly desperate. Every time government bond yields rise a bit, the government’s interest burden explodes. Market smart money understands—narrowing interest rate differentials don’t mean the yen will appreciate; instead, they indicate Japan’s debt chain might be about to break. People are voting with their feet—massively selling yen—which is the real reason for the yen’s decline.

Currently, there are three forces suppressing the yen:

First, US Treasury yields remain high. Although the US-Japan interest rate differential has narrowed, the absolute interest rates still favor the dollar, which signals to carry traders—continue borrowing yen to buy dollars.

Second, the carry trade trend hasn’t stopped. Simply put, holding low-interest yen to exchange for high-yield assets is still ongoing.

Third, the Bank of Japan’s stance is vague. Without a clear rate hike position, investor confidence cannot be boosted.

To break the deadlock, three key factors need to be watched: when the Federal Reserve will truly start cutting rates, whether the Bank of Japan can firm up its rate hike stance, and whether Japanese government bond auctions will encounter cold reception.

This market trend is no longer a traditional exchange rate game. Debt concerns have surpassed all textbook rules and become the core variable driving global capital flows. Crypto market observers should also pay attention to this—when the fundamentals of traditional finance distort like this, the direction of global capital flows often shifts in unexpected ways.

Smart money worldwide is quietly adjusting its chips in this game.