Provenance
This standalone page was migrated from the February 2026 compendium corpus.
What is predicted: The euro will face structural instability from fiscal fragmentation and lack of unified fiscal policy, while yen carry trade dynamics create systemic risk through JGB stress, institutional flow disruptions, and plumbing channel contagion. The dollar maintains reserve status but at increasing yield cost. These currency stresses are symptoms of five-factor divergences between countries and blocs.
Evidence supporting: The yen carry analysis is the channel’s most technically sophisticated contribution. The Bank of Japan ended negative interest rates in March 2024 and raised to approximately 0.25% in July 2024, but still holds 52% of all outstanding JGBs, creating a market with minimal private liquidity. Core inflation has exceeded 2% for 40+ consecutive months. The Standing Repo Facility hit record usage of 40 billion/month in T-bill buying — reported but not independently verified in this compendium) effectively constitute non-QE QE if the figure is accurate. COMEX experienced a cooling system outage, 30% margin hikes that crashed silver 15%, and EFP blowouts exceeding $60-100/oz on tariff threats. Japanese life insurers face hedging costs that erode foreign yield advantages, potentially forcing portfolio rebalancing. The EU faces 300 billion euros in annual capital outflows, confirming structural euro-area capital flight. The lack of fiscal union and common bonds leaves the euro vulnerable to asymmetric shocks.
Evidence against: The yen carry analysis is descriptively excellent but prescriptively vague. “Monitor long-dated JGB dynamics” is not an actionable trade. Japanese institutional investors are “sticky” holders of US Treasuries — the primary risk is a marginal buyer strike rather than a fire sale. The Fed’s SRF and RMP tools were specifically designed to prevent plumbing stress from cascading, and they have so far worked. The COMEX events were resolved without systemic contagion. Euro instability has been predicted for over a decade without the currency regime breaking. The ECB has demonstrated willingness to act as backstop (OMT, PEPP, TPI) and has so far prevented peripheral yield spreads from becoming existential. The framework risks confusing plumbing volatility (temporary dislocations) with structural breaks (permanent regime changes). Five factors do not directly model balance-of-payments dynamics and monetary policy transmission — these are macro-financial architecture issues that operate on different causal mechanisms.
Falsification criteria: (1) BoJ successfully tapers JGB purchases without yield spikes or market dislocation through 2027. (2) Japanese institutions increase US Treasury holdings despite BoJ normalization. (3) Euro-area fiscal integration advances (common bonds, fiscal transfer mechanism) sufficiently to prevent the next peripheral stress episode. (4) Fed RMP program ends without Treasury market stress. (5) Yen strengthens to sub-130 without triggering margin call cascades.
Timeline and testability: Continuously testable via JGB yield curves, SRF usage, COMEX spreads, and euro-area yield differentials. The 2-5 year tactical window is appropriate.
Current assessment: Mixed signals. The plumbing stress indicators are real and documented but have not yet produced the systemic breaks the framework implies. The prediction functions better as a risk-monitoring framework than as a directional forecast.