LTCM Collapse: The Yen Carry Trade That's Back On

Aug 30, 2026 · USDJPY, Bank of Japan · 6:53 video

By a former derivatives trader with 10 years experience at three of the world's largest investment banks.

The full breakdown runs 6:53. The written version below covers the numbers.

The smartest hedge fund ever built made 40% a year, had two Nobel Prize winners as partners, and lost $4.6 billion in less than four months. This is episode 9 of Credit Event: the LTCM collapse of 1998, the yen carry trade unwind that actually killed it, and why the Bank of Japan's September 17 vote puts the same trade back on the table.

The 1998 tape

Long-Term Capital Management, founded 1994 by John Meriwether, the Salomon Brothers bond arbitrage head from Liar's Poker. Robert Merton and Myron Scholes were partners and won the Nobel Prize in 1997. A $10 million minimum, over $1 billion raised, returns above 40% in 1995 and 1996. $4.7 billion of equity controlling $125 billion of positions, 25 to 1, with over $1 trillion in derivatives notional. Much of the borrowing was in yen at near-zero rates: the carry trade, 1998 edition.

How it ended

August 17, 1998: Russia defaults. Friday August 21: the fund loses $553 million in one day. By September equity is down to about $400 million and leverage is past 50 to 1. Warren Buffett offers $250 million for the whole fund with a one hour deadline and they let it expire. September 23: the New York Fed puts 14 banks in a room, Bear Stearns walks, and $3.6 billion buys 90% of the fund. On October 7 and 8 the yen goes from 136 to 112 against the dollar in three days, the final margin call. Every spread LTCM bet on closed in 1999 and the $3.6 billion was repaid by 2000. They were right about the destination and died on the road.

The 2026 setup

USDJPY near 159. On July 30 and 31 Japan spent about $59 billion defending the yen and the US Treasury joined in, the first US yen buying since 1998. The yen went from 164 to 157 in a week. The Bank of Japan sits at 1.00%, the highest since 1995, and the July vote was 8 to 1 with the dissent wanting 1.25%. The BOJ's own forecast has core inflation back above 2% from September. The next meeting is September 17, 2026, and pricing for a hike is near a coin flip.

The smoke detector

High yield credit spreads widening while the VIX stays calm. That was the 1998 tell, and right now it is quiet. If the BOJ hikes and the yen goes through 150, that is the 1998 margin call starting. Leverage does not care whether you are right. It only cares when.

The mechanics of the trade itself are in Japan Carry Trade Unwind: Is This 1998 Again?.

Sources: Federal Reserve Bank of New York accounts of the September 1998 recapitalisation; Bank of Japan policy statements and the July 2026 Outlook Report; Japan Ministry of Finance intervention disclosures; contemporaneous USDJPY prints. Nothing here is investment advice.