Is the yen's plunge the fuse for a new round of crisis? Soaring oil prices may unravel carry trades, and $1.2 trillion in US Treasuries faces liquidity risk.

According to Zhitong Finance, Martin Pelletier, portfolio manager at TriVest Wealth Counsel, stated that the continuous rise in oil prices could put pressure on the yen, threaten the popular “yen carry trade,” and potentially affect the liquidity of the U.S. Treasury market, thereby creating new stress in global financial markets.

Due to ongoing conflicts in the Middle East, the yen has fallen sharply, reaching its lowest level since 2024. On Friday, the yen fell as much as 0.2% against the U.S. dollar to 159.69.

Pelletier pointed out that Japan is particularly vulnerable to energy shocks, as the country relies on imports for almost all its fuel needs.

He wrote: “The risk posed by rising oil prices is particularly significant for Japan, because almost all of the country's energy is imported.” He added that higher crude oil costs would quickly widen the country's trade deficit and weigh on the exchange rate.

This dynamic could develop into a self-reinforcing cycle. Pelletier stated: “High oil prices will immediately widen Japan’s trade deficit, putting downward pressure on the yen.” Since oil is priced in U.S. dollars, a depreciating yen raises local energy costs, importing inflation into the economy through electricity, transportation, and broader consumer prices.

This pressure could force the Bank of Japan to adjust its policies, potentially undermining the economic foundation of the widely used yen carry trade, which relies on the country's extremely low interest rates.

Pelletier also highlighted the impact on the U.S. Treasury market.

He said, “Japan holds about $1.18 trillion to $1.20 trillion in U.S. Treasury securities, making it the largest foreign holder,” and noted that Tokyo sold U.S. Treasuries to fund currency intervention after oil prices surged during the Russia-Ukraine conflict in 2022.