Not All JGB Yield Shocks are Carry Shocks: Curve Location and the Global Transmission of Japan’s Rate Normalization

Abstract

Rising Japanese government bond (JGB) yields are often treated as direct evidence that yen-funded carry trades are becoming uneconomic and that Japanese capital will return from foreign assets. That interpretation conflates curve location, relative currency sensitivity, and aggregate balance-sheet adjustment. This paper separates a daily short-end proxy from an orthogonalized long-duration innovation over January 2013-July 2026 and estimates transmission through predetermined BIS yen-credit and IMF portfolio-holdings gradients. The primary sample contains eight practically tradable currencies; four managed, restricted, or disrupted currencies enter only an extended sample. Hierarchical interaction models include the time-varying exposure levels, and 999 moving-block replications re-estimate both stages of long-duration inference. The primary linear short-end gradients are statistically equivalent to economically negligible effects at H0, H1, and H5. Directional exposure and average-carry estimates remain inconclusive. Positive-shock high-volatility amplification survives an expanded fifteen-test Holm family at H1, while the direct positive-minus-negative volatility contrast survives its three-horizon family at H5. These results do not coincide at a common horizon and therefore cannot satisfy the paper's joint carry-unwind rule. The sole full-family rejection is also sensitive to expanding the family from 18 to 19 tests. Long-duration gradients and weekly local projections through eight weeks do not confirm portfolio substitution or later repatriation. The evidence supports limited historical state dependence, but neither a systemic carry unwind nor confirmed capital return.

Author abstract from the research manuscript. Typography and line breaks have been normalized; the linked source may show a different manuscript version.