Econotics

Key Takeaways

All available choices for Japan carry severe potential consequences. Selling Treasuries to fund Yen purchases—a move that was not well-received by US Treasury Secretary Janet Yellen. Or a rate hike by the (BoJ), which risked triggering a global financial crisis.

Currenicies

Image by Gerd Altmann from Pixabay

A near-global financial crisis. The recent market fluctuations have been significantly influenced by the well-known "yen carry trade."

This financial strategy involves borrowing Japanese Yen at near-zero interest rates and investing the borrowed funds in higher-yielding assets such as the USD at 5%, stocks, gold, and cryptocurrencies. While the exact scale of these trades is unknown, estimates suggest their total value ranges from over $4 trillion to as much as $20 trillion.

Bank of Japan's Rate Hike

The situation intensified when the Bank of Japan (BoJ) raised interest rates, exacerbating expectations of rate cuts from the US Federal Reserve. This rate hike led to a substantial appreciation of the Yen. As the Yen surged, traders involved in the yen carry trade were forced to close their long positions in various assets to repay their yen loans leading to the significant sell-offs observed on Monday, August 5th.

Potential Japanese Government Intervention

The Japanese government faces a difficult decision: either combat inflation and Yen depreciation by having the Bank of Japan hike rates, which nearly triggered a global financial crisis, or return to market intervention by selling Treasuries to fund a substantial Yen intervention, a move that was not well-received by US Treasury Secretary Janet Yellen.

The other choice is to accept continued inflation and Yen depreciation.

Navigating Complex Choices

Japan remains in a challenging position, trying to stabilize its declining currency without upsetting the US and global markets. All choices have severe potential consequences, leaving Japan with no easy options.