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The financial world loves to categorize. We sort currencies into buckets labeled “safe haven” or “high yield” as if they were apples and oranges at a grocery store. But this sorting impulse, while useful, conceals more than it reveals.
Consider the Japanese yen and the Swiss franc. Both have served as funding currencies for carry trades. Both offer low yields. Both appreciate when the world panics. Yet treating them as interchangeable is like assuming all quiet people are quiet for the same reason.
The carry trade, at its core, is delightfully simple. You borrow money where it’s cheap and invest where returns are higher. The profit is the spread, minus the nagging risk that the currency you borrowed in decides to strengthen and eat your lunch.
For decades, traders have borrowed in yen and francs to fund positions in Australian dollars, Brazilian real, or whatever else promised a fatter yield. The logic seemed sound. Low rates here, high rates there, collect the difference.
But anyone who lived through August 2024 saw something curious. The yen surged. Carry trades unwound with violence. Markets convulsed. Yet the Swiss franc, that other pillar of the funding currency world, moved differently. It strengthened, yes, but without the same explosive quality. The franc behaved like a safe haven. The yen behaved like a coiled spring releasing.
This divergence reveals a truth that gets lost in the spreadsheets. These currencies are not merely low yielding assets. They are products of entirely different economic ecosystems, different social contracts, different relationships between state and citizen.
Understanding why they cannot substitute for each other requires looking beyond interest rate differentials into the architecture of economies themselves.
The Geography of Money
Money, we forget, has a location. Not just a nation of origin, but a geographic logic that shapes its character. Switzerland is small, mountainous, and surrounded. Japan is an island chain, isolated by water but connected to Asia through trade. These geographical facts are not decorative. They are foundational.
Switzerland’s geography has made it a vault. Mountains make excellent barriers. For centuries, the difficult terrain protected Swiss independence and created a culture of neutrality. This neutrality was not passive but active, a choice to remain outside conflicts while providing services to all sides. The banking sector grew from this positioning. Money flowed to Switzerland not because Swiss yields were attractive but because Swiss vaults were secure. The franc became strong through accumulation, through being the place where wealth went to hide.
Japan’s geography created a different imperative. Islands need trade. They cannot be self sufficient in resources. Japan’s modern economy was built on importing raw materials and exporting manufactured goods. This required a currency that facilitated exchange, not one that hoarded value. The yen needed to be liquid, available, useful for transaction. Its role in global finance grew from Japan’s role as a manufacturing and exporting giant, not as a keeper of other people’s wealth.
These geographic origins continue to echo. The franc appreciates because people buy it for safety. The yen often weakens during expansions because it flows out to fund global trade and investment. When the yen does strengthen sharply, it’s usually not because people are fleeing to safety but because they are unwinding the leverage that had accumulated.
The Central Bank Philosophies
Every central bank claims to pursue price stability and growth. But like families who all claim to value honesty, the details of how they practice these values diverge wildly. The Swiss National Bank and the Bank of Japan have approached their mandates from almost opposite directions.
The SNB has spent years trying to weaken the franc. This is a strange job for a central bank of a safe haven currency. They have set negative interest rates, intervened in currency markets, and accumulated a balance sheet stuffed with foreign assets. Why? Because the franc’s strength is economically inconvenient. Switzerland exports watches, pharmaceuticals, precision equipment. A strong franc makes these products expensive for foreign buyers. The SNB fights against the very quality that makes the franc attractive.
There is irony here. The SNB creates weak franc policies, yet the franc remains strong. The market seems to wink at the central bank’s efforts. Traders know that in a genuine crisis, Switzerland will remain Switzerland. The mountains will still be there. The institutions will still function. The SNB can intervene all it wants during calm periods, but when panic strikes, capital flows to safety regardless of what interest rates say.
The Bank of Japan has faced the opposite problem. For decades, they have tried to create inflation in an economy that seemed allergic to it. Ultra-low rates, quantitative easing, yield curve control. The policy toolkit got deployed with increasing creativity. Yet inflation remained dormant until recently. The yen weakened during this period not because traders feared Japan but because they correctly understood that Japanese savings were seeking returns elsewhere.
Here is where the carry trade psychology differs. Borrowing in yen felt safe because the BOJ seemed committed to keeping rates at zero indefinitely. The central bank was not fighting against the currency’s use as funding. If anything, they were facilitating it. A weak yen helped Japanese exporters. Capital outflows were not a policy problem but a feature.
Borrowing in francs always carried a different tension. The SNB might maintain negative rates, but they were doing so reluctantly, fighting against market forces that wanted to push the franc higher. A sudden shift in global risk sentiment could overwhelm SNB interventions. The central bank was swimming against the tide.
Yen carry trades felt like floating downstream. Franc carry trades felt like borrowing from someone actively unhappy about lending to you.
The Cultural Substrate
Currencies are cultural artifacts as much as financial instruments. They encode national attitudes toward debt, saving, risk, and the future. Japanese and Swiss cultures have produced very different monetary personalities.
Japan’s economic culture emerged from post-war reconstruction. The priority was building industrial capacity, creating employment, achieving growth. Household savings were channeled through banks to industry. The government guided development. This system required a cheap currency to support exports and an accommodative monetary stance to fund expansion. When growth slowed and deflation set in, the cultural response was not to accept decline but to preserve social stability. Low rates kept zombie companies alive but also prevented painful restructuring. The yen became a currency of preservation, of maintaining what existed rather than creative destruction.
This creates a particular psychology for carry traders. The yen funding market is deep because Japanese institutions need to invest somewhere. With domestic yields at zero and an aging population requiring returns, capital seeks opportunities abroad. Insurance companies, pension funds, and retail investors all became willing providers of yen liquidity. The carry trade was not fighting against Japanese preferences but aligning with them. Japanese savers needed yield. Foreign borrowers needed funding. The yen was the bridge.
Switzerland’s monetary culture has different roots. Banking secrecy and neutrality created an industry around wealth preservation. The goal was not growth but safety, not returns but security. This attracted conservative capital, old money, the kind of wealth that has survived wars and revolutions and values continuity above all. The franc became an instrument of this conservatism. It is not meant to facilitate trade or fund growth. It is meant to endure.
The cultural mandate creates different behaviors under stress. When markets panic, Japanese investors might repatriate capital, but they do so gradually, seeking orderly markets. Swiss banking clients, by contrast, are already positioned defensively. They do not need to rush to safety because they are already there. The franc strengthens not from panicked flows but from its role as the ultimate parking spot for wealth with nowhere else to go.
The Liquidity Paradox
The yen is a more liquid funding currency precisely because Japan runs a current account surplus. This sounds backward. Shouldn’t surplus countries have strong currencies and deficit countries provide funding?
The paradox resolves when you consider what a current account surplus means. Japan exports more than it imports. This generates yen that foreign buyers must acquire. But more importantly, it generates savings that Japanese entities must invest somewhere. A persistent surplus means Japan accumulates claims on the rest of the world. These claims need to be deployed. Japanese life insurance companies cannot just hold yen cash. They need to generate returns for policyholders.
This creates a structural bid for foreign assets and therefore a structural supply of yen funding. The carry trade, in this light, is not exploitation of Japan but a natural outlet for Japanese capital. When traders borrow yen to invest in Australian bonds, they are intermediating Japanese savings to Australian borrowers. The yen’s role as a funding currency is inseparable from Japan’s role as a global creditor.
Switzerland also runs a current account surplus, but the dynamic differs. Swiss surpluses flow from banking services, pharmaceuticals, and high value manufacturing. The capital generated seeks safety more than yield. Swiss investors are less pressured to take risk. Their wealth preservation mandate means accepting lower returns for security. This makes the franc less available as a funding currency. Why would Swiss capital provide cheap funding for risky carry trades when its entire purpose is avoiding risk?
The liquidity difference shows up in market depth. Yen funding markets can absorb enormous flows. Trillions have been borrowed in yen over the years. The franc funding market is shallower. Not because Switzerland is smaller, though that matters, but because the fundamental purpose of Swiss capital is different. Yen seeks a home. Francs have already found one.
Crisis Behavior and the Unwinding
The true test of any financial relationship is what happens when it breaks. Carry trades look profitable until they unwind. How yen and franc positions unwind reveals their essential differences.
Yen carry trade unwinds tend to be sharp and violent. This is not because the yen is more volatile in normal times. It is because of the accumulation pattern. When yen rates stay at zero for years, the temptation to add leverage becomes overwhelming. Traders layer on positions. Hedge funds pile in. Retail investors in Tokyo buy foreign bonds through uridashi. The structure becomes top heavy. Everyone is leaning the same direction.
When something changes, even marginally, the unwind cascades. If the BOJ hints at policy normalization, suddenly the fundamental assumption breaks. Yen funding was predicated on rates staying low indefinitely. Any suggestion otherwise triggers recalculation. But here is the brutal part. Unwinding requires buying back yen. This pushes the yen higher. Which makes carry trade losses worse. Which forces more unwinding. The technical term is a reflexive loop. The more honest description is a stampede.
August 2024 demonstrated this perfectly. The BOJ raised rates by a tiny amount. Markets had expected this. Yet the yen surged anyway. Why? Because the carry trade position was so large that even marginal unwinding moved markets. Traders were not reacting to the rate change itself but to the awareness that everyone else might also react. The first one out the door does okay. The last one gets crushed.
Franc movements in crises follow a different script. The franc strengthens, but usually more gradually. This is partly because franc carry trades are smaller to begin with. But more importantly, franc appreciation is driven by safe haven demand rather than technical unwinding.
When geopolitical tensions rise or banking systems wobble, institutions buy francs as insurance. This is portfolio allocation, not forced deleveraging. The flows are large but not panicked. The SNB might intervene, providing some buffer. The movement has velocity but not violence.
The difference matters enormously for risk management. A trader can potentially manage a gradual franc appreciation. They can hedge, reduce position size, wait for opportunities. A yen unwind offers fewer options. The speed overwhelms hedging strategies. The correlation breakdowns destroy portfolio assumptions. What looked like diversification becomes concentrated pain as every risk asset dumps simultaneously while the yen spikes.
The Policy Coordination Problem
Funding currencies exist within policy frameworks that shape their behavior. The coordination, or lack thereof, between monetary and fiscal authorities creates different dynamics for yen and francs.
Japan has demonstrated remarkable, some might say disturbing, coordination between the BOJ and fiscal authorities. When growth falters, both sides ease. The BOJ keeps rates low and buys government bonds. The finance ministry spends. This alignment means yen policy is predictable in a way. The government will not tolerate yen strength that threatens the export sector. The BOJ will not tighten while deflation risks remain. Traders can front run this consensus.
This creates moral hazard for carry trades. If everyone believes the BOJ will keep yen weak, the trade becomes crowded. The eventual policy shift, when it finally comes, catches massive positioning offside. The August 2024 chaos was not a surprise in principle. Everyone knew rates could not stay at zero forever. But the timing and the positioning made it devastating.
Switzerland’s policy coordination is looser, or perhaps just more complicated. The SNB is independent in ways the BOJ is not. The finance ministry cannot direct SNB policy. But Switzerland also operates within European realities without being in the EU. The franc’s strength is partly an EU problem. When eurozone crises emerge, capital flees to Switzerland. The SNB must respond not just to domestic conditions but to continental instability they did not create and cannot control.
This makes franc policy less predictable in some ways and more predictable in others. Less predictable because external shocks can force SNB action. More predictable because the SNB’s response to franc strength is consistent. They will resist it. They do not want the franc to appreciate. But their resistance has limits, and markets know it. There is a floor to how weak the franc can get but no ceiling to how strong it might spike in genuine crisis.
The Endgame Question
Every carry trade lives with an uncomfortable question. What is the endgame? How does this position exit gracefully? For yen and franc trades, the endgame scenarios are completely different.
The yen carry trade endgame has always been Japanese policy normalization. When will the BOJ raise rates? When will Japan escape its deflationary trap? These questions have been debated for thirty years. The remarkable thing is how long the answer was “not yet.” But not yet is not the same as never.
Traders betting on yen funding had to make a temporal bet. Can I get out before normalization happens? Can I earn enough carry to offset eventual losses? This is a timing game. It requires reading BOJ communications, watching inflation data, monitoring political pressure. When the endgame finally arrives, it is a discrete event. Rates change. Policy shifts. The trade is over.
The franc carry trade faces a more existential endgame question. What would make Switzerland no longer safe? What scenario causes capital to flee francs rather than seeking them? This is not about interest rates or policy normalization. It is about Switzerland’s fundamental character changing. Perhaps Swiss banking secrecy finally collapses. Perhaps European integration finally absorbs Switzerland. Perhaps some crisis overwhelms even Swiss stability.
These scenarios feel distant, almost fantastical. Which is precisely why the franc remains a safe haven. The endgame is not on anyone’s forecast horizon. But this also means the franc can spike unexpectedly when new sources of global uncertainty emerge. There is no policy timetable to front run, no inflation target to watch. The franc strengthens when the world becomes more dangerous, and the world’s capacity for becoming more dangerous is unbounded.
The Hierarchy Revealed
Both currencies fund different things in different ways for different reasons. The yen funds carry trades because Japan has capital that needs returns and a central bank that accommodates outflows. The franc “funds” positions only reluctantly, as a byproduct of Switzerland’s role as a global safe deposit box.
There is a hierarchy here, but not of quality or safety. Rather, a hierarchy of purpose and function. The yen is a working currency. It circulates, facilitates, lubricates global finance. The franc is a storage currency. It accumulates, preserves, endures.
You can borrow yen at scale because the borrowing aligns with Japanese institutional needs. You can borrow francs only when you are willing to bet against Switzerland’s safe haven status, which is a bet few are comfortable making in size.
This explains why crisis responses diverge so sharply. The yen spikes because leverage unwinds. The franc rises because demand increases. One is technical, the other fundamental. One is about position unwinding, the other about capital preservation. They may both appreciate during stress, but the mechanisms are unrelated.
For traders, this hierarchy demands different approaches. Yen funding requires monitoring positioning, watching for consensus trades becoming overcrowded, preparing for sudden policy shifts. Franc positions require understanding geopolitical risk, tracking safe haven flows, accepting that normal risk models break during genuine crises. Treating them interchangeably is like using a screwdriver and a hammer as if they were the same tool because they both involve hitting things.
Currencies are not just vehicles for carry. They are expressions of national economic strategies, cultural values, and geopolitical positions.
Understanding this transforms how we think about currency markets. We stop seeing exchange rates as prices that clear supply and demand and start seeing them as ongoing negotiations between different economic philosophies.
The carry trade becomes less a technical arbitrage and more a bet on which philosophy will prevail in the coming months or years. Will preservation or growth dominate? Will safety or return matter more?
The yen and franc give different answers to these questions. They always have and likely always will. Recognizing their differences is not just about better risk management, though that matters.
It is about understanding that money is never neutral, never just a medium of exchange. It carries history, culture, and collective choices about what kind of society to build.
Some societies choose to lend. Others choose to keep. The currencies reveal the choice.