Propping Up The Yen, Again and Again
Can Japan just keep propping up the yen forever?
At a certain point, Japan won’t be able to just keep dumping dollars and Treasuries to prevent its currency from imploding.
With an economy so sensitive to rate hikes after decades of zero-interest rate policy, the Bank of Japan can’t endlessly jack up the cost of borrowing without risking severe consequences. And, even if Washington could be convinced to do so, the US Treasury and Fed can’t save Japan by buying yen directly without spiking yields and weakening the relative strength of the dollar.
Japan’s repeated attempts to defend the yen through interventions are going to hit a wall of reality built from decades of ultra-loose policy, massive debt, and a collision with unyielding global forces. As Japanese Finance Minister Satsuki Katayama has affirmed, Japan stands ready to act against excessive forex volatility, emphasizing interventions that avoid spiking Treasury yields. But she walks an impossible tightrope. Foreign governments led by Japan and China are offloading Treasuries to defend their currency from oil shocks amid the ongoing conflicts in the Middle East.
As the largest foreign holder of US debt, every yen-support operation out of Japan is a potential accelerant for higher yields. In March alone, Japan shed about $47 billion in Treasuries, dropping to $1.191 trillion, as it battled yen weakness past sensitive levels amid surging energy import costs. They’re liquidating dollar assets to buy yen, directly feeding into a Treasury market already flashing warning signs. Now Treasuries have entered a “danger zone” of surging long-term yields, with the 30-year yield recently pushing above 5.2%, its highest since 2007, while the 10-year climbed toward 4.7%.
HSBC and others warn that further repricing of terminal rates could hammer risk assets. The bond vigilantes are waking up to sticky inflation, geopolitical oil spikes, and endless deficits, and Japan dumping more paper to prop up its currency (yet again) adds more powder to the keg. At what point does the feedback loop break?
Peter Schiff has been ringing the alarm bells about Japan unloading US debt. The risks of Tokyo selling US Treasuries to fund stimulus or interventions are clear, at a time when the US can’t afford it:
That will send US bond yields higher and the dollar lower, worsening stagflation.
Japan needs a weaker yen for exports but can’t tolerate a collapse, so it intervenes, selling Treasuries that push yields up and complicate the same dollar dynamics it relies on. It’s a contradiction where the math can only lead to one possible outcome: a race to the bottom. You can perform a high-wire act with no net and get away with it for one show, maybe two shows, or maybe even a hundred. But eventually, the audience is going to witness something horrible. Every time the yen needs to be rescued again, we come a little bit closer to the inevitable end result.
Japan isn’t alone, either. De-dollarization is picking up steam across the world, and China joined its historical rival by slashing its Treasury holdings to...(READ THIS FULL ARTICLE HERE).