Right now, the market is fixated on when the Federal Reserve will cut interest rates, but to be honest, people might be overlooking a more fatal variable—a “liquidity earthquake” coming from Japan.

This issue starts with the yen carry trade. For the past twenty years or so, global institutions have been borrowing yen at near-zero cost, converting it to US dollars, and pouring it into high-yield assets like US Treasuries and US stocks. This strategy has supported a significant portion of global liquidity, and the scale is staggering—trillions of US dollars.

But now the script has flipped. The Bank of Japan has started raising interest rates, directly undermining the foundation of this game. Not only is the arbitrage opportunity gone, but currency expectations have also changed. Now, traders need to do the reverse: sell US dollar assets → exchange for US dollars → buy yen to repay debt. Note, this process is directly pulling dollars out of global markets.

Here’s something easy to underestimate: the speed of unwinding these positions could be much faster than the Fed’s liquidity injections. The former is proactive and fierce, and can even become self-reinforcing—the more it drops, the more positions get closed out; the latter is gradual and sluggish. When these two forces collide, the result may not be the “easing” the market expects, but rather a temporary “dollar shortage.”

Assets that usually appear to have ample liquidity are the most dangerous in these times. When global dollar liquidity really tightens, that’s when you’ll see who’s swimming naked—highly leveraged derivatives, liquidity-dependent alternative assets, and those with valuation bubbles could all become the first to be sold off.

So don’t just focus on rate cuts; the real test may come from that “pulling the plug” move on the other side of the Pacific.