December 19—this date has been repeatedly mentioned in financial circles lately. The whole market is watching one thing: Will Japan really raise interest rates?

To be honest, this expectation has already started to stir up the market. The yen is rising, Japanese bonds and stocks are falling, but what really makes people nervous isn’t these domestic fluctuations in Japan, but a deeper issue: If the yen really does hike interest rates, could it trigger a global financial tsunami?

This might sound alarmist, but to understand why everyone is so nervous, we need to look back at two events from decades ago.

**What did Japan experience back then?**

How crazy was Japan in the 1980s? There was a saying at the time: "Japan is going to buy the US." But then came two heavy blows: First, the US forced Japan to sign the Plaza Accord, and the yen soared in a short time; exports instantly collapsed, so the Bank of Japan had to slash rates to rescue the economy, which sent domestic housing prices skyrocketing. In the end, they had to slam the brakes and hike rates—boom, the bubble burst.

Since the 1990s, Japan has fallen into the "lost 30 years" trap. GDP? Hovering around $5 trillion, barely growing. Two things were behind this:

First, after the real estate crash, Japan’s six major financial groups engaged in cross-shareholding, digesting bad debts internally. Risks weren’t resolved, they were shouldered collectively.

Second, with the economy stagnating for so long, the Bank of Japan started issuing massive amounts of government bonds, pushing rates to zero or even negative. With no opportunities at home, what did the money do? It flowed abroad. Huge amounts of capital and industries expanded overseas.

**The "carry trade" born of zero interest rates**

This led to a bizarre phenomenon: Since borrowing yen cost almost nothing and the currency kept devaluing, global funds started playing the carry trade—borrowing yen at zero rates, converting it into higher-yielding dollars, or a decade ago, investing in fast-growing markets like China.

What’s the core logic of this game? Two bets:
1. The Bank of Japan will keep rates at zero.
2. The yen will keep depreciating.

As long as these hold, the carry trade is a sure thing.

So how do you borrow yen? You can’t just conjure it out of thin air. The usual approach is to use Japanese government bonds as collateral, borrow against them, keep leveraging up, and scale up the funds. This is exactly how US financial markets operate—using US Treasuries as collateral to leverage up, then using that money to speculate in US stocks.

**What’s the biggest risk?**

Major volatility in government bond prices.

Once bond prices drop below a certain threshold, you have to post more collateral. If you’re highly leveraged, you’ll have to deleverage. How? Sell assets for cash. Stocks, bonds, anything with good liquidity goes first.

And the most direct factor affecting bond prices? Central bank rate adjustments.

So now you get it—why the market is so sensitive to a Japanese rate hike. Because if rates rise, Japanese government bond prices will fall, 10-year yields will rise, and this could trigger forced deleveraging in the yen funding market and global carry trades.

Once deleveraging starts, there could be a wave of massive selloffs in global financial markets, potentially sparking a worldwide financial storm.

**How big is the scale?**

If the amount of money involved was small, it wouldn’t matter. The problem is, this is a huge game.

Japan’s government bond market is about $7.5 trillion, roughly 150% of Japan’s GDP. Estimates put the scale of international carry trades centered on the yen at $3–4 trillion.

What does this mean? A ticking time bomb that could go off at any moment.

**Where’s the red line?**

The second critical factor is how high Japan’s 10-year government bond yields will go—this directly determines the scale of deleveraging.

Currently, Japan’s 10-year yield has already broken 1.9%, a new high since July 2007. Most believe the Bank of Japan’s red line for this metric is 2%.

We’re now just one step away from that red line.

If the price of the 10-year Japanese government bond falls below 98, a selloff in global financial markets is likely. This risk is very real.

**What happens next?**

For now, if long-term rate hike expectations for the yen don’t keep heating up, short-term deleveraging risks remain manageable. But if expectations for hikes keep escalating, all bets are off.

Clearly, this is tied to internal Japanese politics. For example, Sanae Takaichi has openly opposed a rate hike before. So in the end, the outcome may hinge on the US’s stance.