What if a single decision on interest rates in Tokyo could quietly pull money out of the US stocks in your retirement account? Felix Prehn, an economist and former investment banker, says the impact of Japan raising interest rates has already started to reach your portfolio.

Estimated reading time: 8 minutes

Impact Of Japan Raising Interest Rates On Your Stock Portfolio (Felix Prehn’s Investing Playbook)

Here is the short version of the impact of Japan raising interest rates: the cheap credit Japan sent into US stocks for decades is being pulled home, and prices drop as it leaves.

Felix Prehn founded the Goat Academy, where his retired Wall Street mentors teach more than 25,000+ regular investors the kind of institutional strategy most people never get shown. He accepts no sponsors, and below he lays out what Japan’s central bank is doing, why it puts your money at risk, and a three-phase plan to protect your portfolio and understand where the opportunities lie.

Key Takeaways

• A move on interest rates in one country can pull money out of your stocks.
• A three-phase plan helps you protect, preserve, and position your money.
• The classic 60/40 mix of stocks and government bonds may fail together now.
• The carry trade quietly props up tech stocks and retirement accounts.
• Three shifts changed the picture: a record-low currency, a benchmark rate rise, a failed intervention.
• One central bank is keeping money at home, and the change looks permanent.
• A viral legal claim about a falling currency turned out to be false.

How Japan’s Interest Rates Rise And Hit Your Portfolio

When Japan’s interest rates rise, the cheap money flowing into US tech stocks for years starts flowing back out, and as it leaves, your dollar-denominated shares drop.

The NASDAQ is on track for its worst July in 22 years, and some of the drop has reached your holdings.

So why does a move by a central bank on the far side of the world land in your account? Because a large slice of the money invested in US tech shares was borrowed in Japanese yen. Once Japan raised its benchmark interest rate, parking borrowed money in US stocks stopped paying as well, so investors began to sell stocks and pull money home.

Nobody knows the full size of the money involved, which is exactly why the pressure could get worse before it settles.

The Three-Phase Playbook To Protect And Grow Your Money

Felix gives you a plan built in three phases.

Phase One: Protect Your Money

Phase one is about protecting what you already have, and it starts by cutting your exposure to whatever gets hit hardest. Felix is clear he is not telling you to sell everything.

A carry trade unwind tends to punish positions with three traits:

• high valuations
• US tech
• funding by cheap credit

So look at each stock you have and ask two simple questions. Is the share priced for a perfect future? Was it bought with cheap money? If the answer is yes to each, it is your highest-risk holding, and trimming a little makes sense.

Do not panic sell. Move calmly and deliberately instead, and because Felix is not a financial adviser, think strategically about your unique portfolio before acting.

Next, get rid of any leverage or margin. Felix calls margin a horrible thing capable of wiping you out at the worst possible moment, and in his view the small upside is never worth the risk.

Then there is cash, which gets a bad name nowadays. Many high-yield savings accounts currently pay around 4 to 5% while you wait for the picture to clear, and cash leaves you ready to buy the moment prices drop.

Phase Two: Defend Your Value With Gold And Defensive Stocks

Phase two is about owning things able to keep their value while markets stay shaky, and gold heads Felix’s list.

Gold benefits from the exact shift under way now: a weaker US dollar, bigger price swings, and rising doubt about US assets. Demand from the world’s central banks is real too. China alone bought about 15 tons of gold in June, its largest single-month purchase in three years.

Gold has pulled back about 28% from its record high, so the price is pausing, not collapsing. Goldman Sachs has set a year-end target near 4,900, and JP Morgan a little lower near 4,500. Targets are forecasts, not promises.

Beyond gold, defensive sectors like healthcare and utilities tend to stay steady in rough conditions. They are not exciting, and Felix says the calm is the whole point; they give you something reliable while the situation plays out.

Phase Three: Position For What Comes Next

Phase three is where a crisis quietly reshapes which assets do well, and every shift traces back to a weaker dollar. As the carry trade unwinds, investors sell the US dollar to buy yen, so the dollar falls, and a falling dollar has historically tended to help four groups, though nothing is guaranteed.

1. Emerging market stocks, which usually do well when the dollar is weak. A US-listed index fund is an easy way in.
2. US multinationals like Microsoft and Netflix, which earn plenty abroad. A weaker dollar makes foreign earnings worth more once converted back, so the profit rises even when the business stays the same.
3. Currency-hedged Japan. Higher rates mean fatter margins for Japanese banks, and Japan’s economic growth is picking up at home. A hedged index fund lets you capture the recovery without taking on the currency risk.
4. Commodities such as oil, copper, and agriculture, all priced in dollars. When the dollar weakens, they get cheaper for foreign buyers, demand rises, and prices follow.

There is one more, for the patient investor: the NASDAQ itself. Since 1999 it has grown around 11% a year, lived through five major bear markets, and climbed back to new highs every single time. Past performance is no guarantee of what happens next.

That said, to buy the dip, you need spare cash and a long time horizon, which is why phases one and two come first.

Why The 60/40 Portfolio Won’t Protect You Now

The classic 60/40 portfolio puts 60% of your money in stocks and 40% in government bonds, and it is meant to protect you, because normally, when stocks drop, government bonds rise to cushion the fall.

A carry trade unwind breaks the cushion. Stocks and government bonds fall together, because the same cheap Japanese money was funding stocks and bonds at once, so one shock hits financial markets on each side.

The safety net you were counting on quietly disappears. If you are staring at your portfolio with no real idea what to do next, you are in good company, and it is the precise reason Felix built a plan for a moment when stocks and government bonds drop side by side.

The Carry Trade Explained In Plain Terms

At heart, the investment strategy is simple: it involves investors borrowing cheaply in one country, then putting the money to work in higher-paying assets somewhere else.

Picture a neighbour with a full piggy bank. He lends to you at almost nothing, say 0.1% a year, so you take the money, walk it over to a savings account paying 4.5%, and pocket the difference. The cash was never yours, so the gain feels like it appeared out of nowhere.

For decades, Japan kept borrowing costs low, sometimes below zero, while the US paid far more, so the entire global financial system came to depend on the setup.

Estimates put the carry trade somewhere between 1 and 20 trillion dollars, and nobody knows the real figure.

The money is inside your retirement account right now, propping up your tech stocks and keeping American borrowing cheap. It is also now being called home.

Here is how the unwind speeds up once the Bank of Japan begins raising rates:

1. Borrowing at 1% instead of 0% shrinks the profit, so some investors begin closing their positions.
2. To close, they buy yen back and sell US assets, mostly tech stocks and government bonds.
3. The selling weakens the dollar and drags US shares lower, which pushes even more investors to sell, and the cycle feeds on itself.

The world got a preview in August 2024. The carry trade partly unwound in just a few days, and the NASDAQ dropped more than 10% in three of them. The Bank of Japan backed off then and the fear faded, but now Japan is not backing off.

The Three Shifts Behind Japan’s Big Change

Three separate shifts turned a slow worry into something happening right now.

A 40-Year Low For The Japanese Yen

The Japanese yen is now the weakest it has been against the US dollar since 1986. If you are a Japanese investor owning US stocks, selling them today hands you more yen than at any point in 40 years, which creates enormous pressure to sell US assets and bring the money home. As the yen weakened, the pull only grew stronger.

Japan Raised Its Benchmark Interest Rate To 1%

For most countries a 1% rate would mean nothing, but Japan has run a near-zero economy for decades, and even went negative for years under long-running monetary easing. So when Japan raised the benchmark interest rate from 0 to 1%, it landed like a jump from 0% to 10% in the US, and it rewrites the maths on everything built with cheap Japanese money.

A $70 Billion Intervention As Japan’s Central Bank Struggles

Japan’s central bank launched an intervention worth more than 70 billion dollars between April and May to prop the yen up, and the currency is still at a 40-year low. Japan’s central bank struggles to reverse a drop of such size, because a currency pushed so far out of line is not fixed by throwing money at it. The yen kept dropping further.

Why Japan Is Turning Off The Free Money Tap

Japan is deliberately keeping its money at home. Its banks are tightening lending to foreign borrowers, because the economy has changed for the better. Japan now has inflation, loan growth, healthier business activity, and improved business sentiment, so it no longer needs to export cheap credit to the rest of the world.

Instead, Japan wants more money funding its recovery at home. Its pension funds and insurance companies, long among the biggest buyers of US debt, are finding higher yen-denominated yields on Japanese government bonds, so they are purchasing government bonds domestically and pulling money back rather than chasing American returns.

The free money tap, in other words, is being shut off. Once Japan stops being the world’s piggy bank, everyone else has to raise the money somewhere pricier, which raises costs abroad.

The Viral “Article 589” Myth About The Japanese Yen

You may have run into a viral claim about “article 589” of Japan’s commercial code, described online as a secret legal weapon capable of forcing every carry trade loan to be recalled overnight. Felix checked it himself, and the claim is simply false.

Article 589 covers passenger transportation. It has nothing to do with banking, interest rates, or the carry trade at all.

Never forget, acting on false viral claims is how people lose money.

The Bottom Line

So here is the whole picture in a breath. The Japanese yen is at a 40-year low, the Bank of Japan is raising interest rates for the first time in three decades, and Japanese banks are pulling cheap money back home.

Trillions in carry trade money heading back to Japan puts real pressure on US tech stocks, and the pressure ripples through global markets, which is why the NASDAQ is having its worst July in 22 years. The 60/40 portfolio will not save you the way it used to, while a weaker US dollar quietly helps gold, emerging markets, commodities, and multinationals.

The people who stay steady in a sharp market drop are rarely the ones who panic. They tend to be the ones who understand the mechanics and act before the crowd notices.

Frequently Asked Questions

Why Did Japan Keep Rates Near Zero For So Long?

After Japan’s economic bubble burst, years of falling prices and weak demand kept the country near zero, and it even went negative under long-running monetary easing, unlike most other central banks. Felix does not fault the Bank of Japan for not raising rates earlier, debate any earlier plan for rates to rise moderately, or tie the move to whether the economy contracted or japan’s population has begun declining. His point is simpler: the near-zero era has ended and inflation is back.

How Does Japan’s Central Bank Manage Spiking Inflation?

Japan’s central bank first spent more than 70 billion dollars to prop up the yen, and the effort failed. A rise in the benchmark interest rate to 1% is the stronger lever, one central banks use to counter spiking inflation at home.

Can A Weaker Yen Accelerate Inflation And Squeeze Household Budgets?

A weak yen makes imported food and goods pricier, which can push inflation higher and squeeze household budgets. Felix confirms Japan now has inflation after decades without it, one reason its central bank raised rates. The playbook stays on the carry trade and the yen, not on grocery bills.

As Slowing Economies Recover Momentum, Do Low Rates Create Jobs And Lift Business Activity?

Cheap money can help slowing economies recover momentum, and lower rates are one tool used to create jobs and lift business activity. Felix documents Japan’s turn: loan growth, healthier business activity, and improved business sentiment. The recovery at home is why its central bank stopped exporting cheap credit.

Where Can I Get More Detail On The Impact Of Japan Raising Interest Rates?

Felix has a free research report on the Japan situation at felixfriends.org/japan. He also runs a free live seminar at 10xsummer.com, where he shares his rules and the stocks he plans to buy, with no replay.

Watch Video: US Panic: Japan’s Currency Just Exploded [Hint: Gold]

Video published on July 26, 2026

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