Is the yen plunge the "fuse" for a new round of crisis? Surging oil prices may unwind carry trades, $1.2 trillion US debt faces "outflow" risk

Source: Zhitong Finance Network\n\nTriVest Wealth Counsel Portfolio Manager Martin Pelletier stated that rising oil prices could put pressure on the yen, threaten the widely used “yen carry trade,” and potentially impact liquidity in the U.S. Treasury market, thereby triggering new stress across the financial markets.\n\nDue to ongoing conflicts in the Middle East, the yen has sharply depreciated, reaching its lowest level since 2024. This Friday, the yen/USD exchange rate briefly fell by 0.2%, to 159.69.\n\nPelletier pointed out that Japan is particularly vulnerable to energy shocks because nearly all of its fuel is imported.\n\nHe wrote, “The risk posed by rising oil prices to Japan is especially significant because the country relies almost entirely on imports for its energy needs.” He added that rising crude oil costs would quickly widen Japan's trade deficit and weaken its currency.\n\nThis dynamic could evolve into a self-reinforcing cycle. Pelletier explained, “High oil prices will immediately expand Japan's trade deficit, putting downward pressure on the yen.” Since oil is priced in dollars, a weaker yen would increase domestic energy costs, transmitting imported inflation through electricity, transportation, and broader consumer prices.\n\nThis pressure could force the Bank of Japan to adjust its policies, potentially undermining the economic foundation of the widely used yen carry trade, which depends on Japan's extremely low interest rates.\n\nPelletier also emphasized the impact on the U.S. Treasury market.\n\nHe stated, “Japan holds about $1.18 trillion to $1.20 trillion in U.S. Treasuries, making it the largest foreign holder,” and noted that Tokyo sold U.S. Treasuries during the surge in oil prices after the 2022 Russia-Ukraine conflict to fund foreign exchange interventions.