The recent combination of expectations for Fed rate cuts and Bank of Japan rate hikes is stirring nerves in global capital markets. If this really happens, there’s a high probability that US dollars will flow into Japan at an accelerated pace—the logic is simple: in the past, carry trades involved borrowing low-interest yen to buy high-yield US dollar assets, but now the interest rate differential is narrowing and the rules of the game have changed.

Investors have started to reverse their operations: selling US dollar assets and converting to yen to repay debts. With yields on yen assets rising and their attractiveness increasing, a flow of US dollars into Japan is almost a foregone conclusion. But here’s a counterintuitive point—dollar inflows into Japan won’t make the US dollar stronger; instead, they’ll push up the yen. Because demand is there, a stronger yen against the dollar is the consensus view in the market.

What we really need to watch out for is another scenario: what if the Fed suddenly turns around and raises rates, while Japan is forced to cut rates? The US-Japan interest rate differential widens again, and the funds that flowed into Japan will immediately switch back to US dollars and flee due to yield differences. The yen would plummet, Japanese asset prices would collapse, and the classic playbook of wealth extraction could repeat itself.

Don’t forget, Japan is carrying debt equivalent to 2.3 times its GDP. Rate cuts can ease the burden, but it can’t withstand currency depreciation—import costs will soar, wealth will flow out, and the country will be caught in a dilemma. History has shown that this kind of “getting fleeced” scenario has happened before.

Of course, this extreme situation may not necessarily play out. Would Japan really cut rates right after just raising them? Market confidence would collapse first, and no one wants to see financial turmoil. The Fed also faces its own challenges, with economic downward pressure and a fiscal deficit; the room for rate hikes is actually quite limited. More importantly, the US and Japan are allies with deeply intertwined interests, and policy coordination is likely—they’re unlikely to take such aggressive actions.

That said, the global financial markets are now interconnected, and even the slightest move in US or Japanese monetary policy can trigger sensitive capital reactions. The underlying interest games and risks of wealth transfer are things we still need to keep a close eye on.