Liquidity, the Fuel that Powered the Markets in 2025 (3/3)

If artificial intelligence supplied the narrative fuel for the extraordinary market performance of 2025, liquidity supplied the oxygen. And while much attention focused on the policies of Western central banks, the most persistent — and ultimately destabilising — source of global liquidity came from elsewhere: Japan.

For decades, Japan was treated as an anomaly — an economy trapped in deflation, operating under its own monetary logic and largely disconnected from global cycles. In 2025, that perception proved dangerously outdated. Japan did not merely remain accommodative; it became one of the principal enablers of global risk-taking. For years, the Bank of Japan accumulated trillions of dollars’ worth of bonds and equities on its balance sheet while holding interest rates near zero.

Ultra-low Japanese rates and a steadily depreciating yen reignited and expanded the global carry trade. Capital borrowed cheaply in yen flowed into higher-yielding assets worldwide — equities, credit, private markets, and speculative investments — reinforcing risk appetite well beyond Japan’s borders. In effect, Japan exported liquidity to the global financial system at a time when other central banks were attempting, cautiously and inconsistently, to withdraw it.

The yen carry trade became one of the most powerful vectors of rising asset prices in 2025, simultaneously driving higher equity valuations and higher leverage across the financial system.

But Japan entered 2025 constrained by its own structural realities. With public debt exceeding 235% of GDP, a financial system dependent on ultra-low rates, and a fragile domestic bond market, the return of inflation and the prospect of sustained economic growth forced a strategic shift.

In September 2025, the Bank of Japan formalised its decision to stop buying assets and became a net seller of bonds and equities. In December, it raised interest rates again, sending ultra-long bond yields to record highs. The implications were immediate and global: the yen carry trade was placed in grave danger — and, by extension, so were risk assets worldwide.

While liquidity continued to inflate financial markets, the real economy was sending a very different signal. Commodities — the most tangible expression of supply, scarcity, and geopolitical tension — surged across the board. Energy, industrial metals, and strategic resources all advanced sharply, reflecting years of underinvestment, supply-chain fragmentation, and the rising costs of deglobalisation.

This rise in commodities is not cyclical exuberance; it is structural stress.

Unlike financial assets, commodities respond to physical constraints. They price geology, geopolitics, energy intensity, and time. The world entered 2025 with depleted inventories, fragmented supply chains, and intensifying strategic competition over resources — from critical metals to food and energy. In this environment, persistent liquidity collided with limited supply.

The implication is critical: inflation risk has not disappeared — it is increasing.

Yet markets throughout 2025 largely priced a return to disinflation and policy easing, even as input costs, commodity prices, and strategic resource pressures moved higher. This contradiction — easing financial conditions into rising real-economy constraints — is inherently unstable. It places central banks in an impossible position: tolerate inflation or risk destabilising markets addicted to liquidity. Bond markets may well force that choice in 2026.

Japan’s role magnifies this risk. A further weakening of the yen would reinforce inflation through higher import and commodity prices. Conversely, any meaningful appreciation would risk a violent unwinding of carry trades, destabilising global asset prices. Either path carries consequences markets have yet to fully confront.

Artificial intelligence and liquidity sustained the rally of 2025. Commodities are now questioning its sustainability. The crypto sphere — the purest expression of speculative excess — has already turned the corner, with Bitcoin down more than 35% from its October peak.

History offers few examples in which prolonged monetary distortion, rising leverage, and tightening physical constraints resolve without volatility.

The extraordinary trajectory of financial markets in 2025 may ultimately reveal less the birth of a new disruptive era than the excessive optimism that characterises investment bubbles.