You Wont Believe What Just Happened in Japan

Japan's yen has made a huge move over the last seven months, and no one has an answer for why. According to mainstream theories, JPY should be soaring, not sinking. So much so it's got the government in Tokyo hollering about currency interventions, of course blaming speculators, saying there's no fundamental reason for why the yen is doing what it's doing. Except there is. There is every fundamental reason for this, starting with what they just reported about Japanese households. Household spending has utterly crashed, and like JPY, this is not just about Japan. The problem is, apart from the globally synchronized downturn we're talking about, mainstream economic theories about how things are supposed to work, like exchange values, they're just wrong. They're dead wrong, and they're demonstrably so. The yen is, in fact, behaving exactly how it should, and that is the problem. The Bank of Japan itself has gone so far that it's emptied out the JGB market of any marginal buyers with its irrational behavior, but rather than rescue JPY, it's only compounding everything. It's adding financial instability to the already poor economic situation. And as I said, household spending just crashed, which is a warning to the rest of the world in a couple of ways, but most of all because it offers more evidence of this post-tariff distortion payback that I've been talking about. Rather than picking up as everyone in Tokyo had said it would, for Japanese households like their American and European counterparts, everything keeps getting worse. They keep falling farther and farther behind, and so does the yen. And the fact this economic situation continues to plague Japan like the rest of the world, again, that's why the yen is doing what it's doing. It's a euro dollar world. So while mainstream economics looks at interest rate differentials and everything wrong, the answers are all right there. Not just in Japan, but how Japan in these ways looks like everywhere else. Chalk this one up to another thing that mainstream economics doesn't just get wrong, it gets completely wrong. So we have to start with household spending, and for a couple of reasons. First, the results themselves. Wait till you see these. But also because the Bank of Japan has made household demand the centerpiece of its inflation theory. From all the way back last year when the rate hiking got started, Kazuo Ueda's position has been that consumer price rates were threatened by the potential for pent-up household demand that was ready to be unleashed by increasing wage gains. Given significant nominal pay rises that were for the first time in really a generation, supposedly this was going to unlock the animal spirits that was long missing from Japan. Flushed with this earned income cash, Japanese consumers were going to go crazy, and that would propel consumer prices into the dreaded inflationary spiral or something. This was the idea, that was the theory. BOJ had to raise interest rates to constrain households before they got out of control. Not a single part of it is true, not one. Even the pay increases aren't what they would otherwise appear to be. In fact, what you see from the income data is what you see all over the rest of the world, therefore globally synchronized, and therefore further explains the plight of the yen. So yes, Japan is now handing out more income. However, higher nominal income isn't the thing, it's not the end of the story. As Americans know only too well from their own experience the past five years, those income gains are nowhere near enough to keep up with the supply shock prices. Costs soared, and incomes only made up for a part of it. And for too many people, only ever a small part. So Japanese households instead keep falling farther and farther behind. And you can actually see this in the income data, just like when we examine the same for Americans and American consumers. In nominal terms, spending looks relatively good, rising maybe consistent with that pent-up demand theory. But adjusted for price changes, the entire picture changes. This isn't just bad, it's getting worse. However much nominal pay is rising, it's nowhere near enough. And this right here explains why Japan is on its third prime minister in a little over a year. Yes, you heard me right. The Bank of Japan can talk about an inflationary economy and recovery that it continues to say remains on track. When Japanese voters keep showing him and all the politicians in Tokyo, they have no clue what they're talking about when it comes to small e economics. Japan's problem is not inflation, it's like everywhere else, the lack of income and the lack of recovery. Of course, what we're really talking about here, we're never talking about central banks, we're talking about euro dollar conditions. And euro dollar conditions have been doing quite a lot and saying quite a lot more recently. And we've got to talk about what's going on here, not just in the context of Japan and JPY, though, that's a big one in all of this, it really fits into all of this. But in the global context, what are these euro dollar signals really telling us? What are they really about? And that's what we're going to do on Thursday, December 16, at 6pm Eastern Time. Join me for our latest webinar in our series where we're trying to fill in all of these massive gaps left behind by central bankers and economists, if you couldn't tell from the theme here in our video. You know, not only do they get everything wrong and backwards, it's oftentimes quite intentional. So to fill in these gaps, to illuminate some truth, some facts and evidence, that's what this webinar series is all about. And the latest one, like I said, Thursday, December 17, 6pm Eastern Time, there's a link in the description to sign up. We're going to talk about what's going on really with these currency values and a whole lot more beside these euro dollar signals. I hope you can join me, it'll be well worth your time. Again, link in the description to sign up. So without household income that's keeping up, of course, household spending isn't going to be either. And in fact, when you look at the two together, what it shows is that household spending is suffering even more than household income, because quite naturally in this situation, Japanese households realizing they're falling further and further behind, become more and more cautious. They're not risk taking, there's not pent up demand. It's exactly the opposite, as always, from what central bankers say. Quite naturally, when faced with these kinds of conditions, people anywhere, it doesn't matter where it is, will look to save more than they spend. So yes, they're doing the opposite of what Waitus said they would. He claimed households would surge into spending with some nominal wage increases. Instead, spending has fallen sharply because those nominal wage increases were never close to enough. And they know how Japanese households know and Japanese voters know, this isn't going to change its basic economics. Now, the one caveat to that was tariff distortions earlier this year. And like everywhere else around the world, the artificial high really began late last year. And the Japanese started buying stuff anticipating that US tariffs might force global prices higher. So not even waiting to see if costs did go up. Like everywhere else, they just went out and bought a bunch of stuff rather than take the chance that costs would end up going a lot higher and who could blame them. All that front loading peaked back in May. Now the Japanese government and the Bank of Japan, they claim that that was actually, that was the pent up demand that they were warning about. The splurge in spending was wage related, they said. A couple of years of pay increases finally triggered the consumption outbreak. While they said that in public to really play up economic circumstances, in private, they knew it wasn't going to hold up. Of course it didn't. Spending fell back almost immediately in June before plunging in September and especially, just look at October. And that's not just in real terms. Nominal spending has followed the same pattern. Tariff distortion leading to now what is a warning to the rest of the world, even supposedly inflationary Japan that's recovering and all the things that the central bank talks about. Even Japan is showing these concrete signs of post tariff distortion payback. So given that, why on earth would the Bank of Japan continue to talk about raising rates? Now first of all, we should note the Bank of Japan is only talking about raising rates. It hasn't actually done any rate hikes since back in January. It's all theater, but it's theater with what is supposed to be a purpose. Quite simply, Japanese officials know the economy sucks. They know it's getting worse, not better, whatever they might say in public. After all, third quarter GDP just sank by the most in almost two years led by, yup, weak consumer spending plus the faltering trade situation. In other words, falling exports after we see payback in the global external sector. But Japanese officials have to appear to be combating inflation, thus the constant hawkish rhetoric that the Japanese people as Japanese voters, they see right through it. Thus, three prime ministers basically in just the last year. What BOJ is really trying to do is talk the yen back higher. That's the so-called inflation problem in Japan. Japanese consumers have been hit with those past price changes, the supply shock that we all know only too well about. But unlike a lot of other places, the weak yen combined with other supply factors like poor rice crops that I've talked about in previous videos, those have kept price changes ongoing to be too high. It compounds the negatives for households who know they keep falling farther and farther behind. Therefore, more than in any other places, thus again, three prime ministers. The weak yen further raises the cost of imported necessities like fuel and food. And the central bank tactic though, it has worked, at least in the respect of the bond market. The threat of further rate hikes has chased away all the big JGB buyers, the pension funds, the insurance companies who don't want to be sitting on paper losses because, you know, might carry out as irrational policies. And it's irrational in the sense they aren't tied to the actual economy like he claims because the actual economy looks nothing like what he says. But the rise in JGB yields from this buyer strike should have, according to mainstream theory, worked to rescue the yen. The higher Japanese bond rates go, the more attractive they would look to investors, especially those inside of Japan who otherwise sends mountain of yen off into the euro-dollar world as the carry trade. By mainstream theory, those higher JGB and other interest rates should be attracting huge amounts of capital back to Tokyo, which would therefore raise the yen exchange value. And as the yen rises in response to these rising rates and these threats for higher rates from the central bank, it should take a lot of pressure off of import costs and therefore consumer prices, getting voters off the backs of all those politicians in Tokyo. So you can see what the Bank of Japan is really trying to do. Get rates up, keep them up as much as possible, not because of pent-up demand or anything, but to get the yen to stop falling. But yet the yen continues to fall anyway because central bankers and economists have no idea how any of this really works. The sad thing is you don't have to take my word for it. I'm going to show you. And since I'm going to show you, that means central bankers know this too. So you have to ask yourself, why do they keep doing this when they know it's wrong and they know it doesn't work? The answer to that is incredibly simple. They have no idea how the world's monetary system works and therefore what it is and why it is that currency values and exchange rates do what they do. Instead of trying to figure this out, they all fall back into the mainstream economics textbook and lie to everyone about all of it. And Japan in 2025 is the very essence of interest rate differentials too. U.S. Treasury yields by contrast to those in JGBs, they're declining. Also the Fed is cutting its policy rate if you care about that kind of thing. In other words, whether you believe central bank policy rate differentials drive the currency value or you think that market differentials do, in Japan's case both of those are highly favorable to the yen, at least in theory. In practice, JPY continues to sink. Now we can look at this from both perspectives. And in both examples, as you can see, interest rate differentials, that's the spread between U.S. dollar rates and yen government rates, the differentials have declined. They have become more favorable to Japan. The additional interest offered by treasuries above their Japanese counterparts has greatly diminished as JGB yields continue to climb higher while treasury yields continue to bolst steep in their way lower. Yet at the same time, the yen has gone in the complete opposite direction, total opposite direction, not somewhat similar or just a small deviation, completely the opposite of what it's supposed to do. And not only that, it's worse at the two-year maturity than it is at the 10-year. In other words, perceived differences in central bank policy positions are even more extreme in Japan's favor and it matters even less than the actual currency market. So this is where the finance ministry's threats of intervention come from. The government says that when judging these things from the perspective of interest rate differentials, JPY should be far stronger. It should be strengthening, not weakening back toward historic lows. But since the currency isn't doing what the government and the central bank think it should be doing, you know what that means. It's time to blame speculators. Those dirty evil speculators must be back at it, forcing the currency to do what otherwise it wouldn't be doing because without speculators, we all know the yen would be rising along with those favorable interest rate differentials which are falling. But what if the yen's exchange rate isn't actually determined by interest rates at all? That would completely eliminate not just a speculator excuse, it would also completely undermine everything that officials are doing, everything that they've said, the whole operation. They have to blame speculators because to admit the truth here would be to blow the whole economics and central banking myth-making sky high. The yen isn't a product of central bank policy differences, it's a byproduct of the euro dollar. But this divergence between how the yen actually behaves and interest rate policy differentials, it's actually nothing new. This is common. This is the thing that they never tell you, they never show you, nobody ever does the homework, nobody looks up in the charts and actually sees what goes on here. Everybody just says this is how it works because everybody says this is how it works. This goes back a long way and Japan is a perfect example of it. And any times when you do see differentials line up with JPY, they're very fleeting, brief, and more just accidental correlations than they are explanations of causation. That includes earlier in this decade, back in 2021 and 2022. There's really nothing more than coincidence. Both the yen and interest rate differences were doing the same things at the same time. The latter wasn't causing the former. That's exactly what we see throughout the last 40 years of exchange rate history with Japan. Once in a while, you'll see some differentials in the yen, they line up, but it's never anything more than short-run and accidental. So at most, there might be some periods when so-called portfolio flows or capital flows, they do chase these differences in interest rates from time to time. But as you can see, they do not. They do not explain the vast majority of the yen's behavior. And most of all, it's a two-year maturity. You hear this all the time, how central bank policies are the biggest, most important factor in everything, especially when it comes to currencies. Yet they matter even less to market differences in yields. Just look at the two-year spread during the entire 2010s. Zero correlation. In many periods, you see mostly an inverse correlation, meaning the relationship that's the exact opposite of what economics tells you should be taking place, like right now. So let's recap the situation in Japan after going through the facts and evidence and not just rote reciting all of these myths and legends and shorthands. The Bank of Japan says the Japanese economy is in danger of an inflationary spiral that's going to be led by pent-up demand among households who got nominal wage gains for the first time in forever. And so they need to raise rates to hold back consumers from spending so that the robust demand doesn't create even more inflation. But consumers are holding themselves back because they know their incomes are nowhere near enough to make up for the past, for the present, let alone any future price changes that are supply in currency matters, not actual inflation. Thus household spending, which is already in the dumps, gets worse, especially now after the tariff distortions have passed into global payback. That's another key point from Japanese household spending. In reality, BOJ is targeting the yen, not really the economy, but doing so hoping increasingly favorable interest rates inside of Japan will somehow strengthen JPY, except JPY is predictably, according to the facts and evidence and history, completely ignoring interest rates. All of which just begs the question, where does Japan's exchange value really come from? And the answer is Japanese household. Now I don't mean that Japanese households are out there investing their funds overseas and therefore wicking the yen through investment flows or contrary portfolio flows. I mean the economic plight of the Japanese themselves and how similar it is to what we see around everywhere else around the world. The same experience you get with voters in Japan is like those in Germany or New Zealand, or if Republicans don't start paying closer attention to the plight of the people rather than pointing to stock prices, you'll see the same thing here in the United States. The yen is just the other side of the dollar, which means Eurodollar. The rising dollar exchange value is the Eurodollar reflecting on these poor and deteriorating fundamentals of a global system that never recovered from 2020, or 2008 for that matter, and because it didn't recover, the underlying economic situation in nearly everything and nearly everywhere is deteriorating rather than improving. A world where households from Japan to China to Germany to the UK and everywhere in between, where they're all falling farther and farther behind, is a world that's going to lead to tighter, more scrutinizing monetary conditions. Common sense, basic economics, and those tighter scrutinizing monetary conditions are what push the U.S. dollar exchange value higher, and in this case, the yen lower. As you can see, it doesn't matter one bit what central banks are doing, what they're going to say they're going to do, or what they may plan to do. We are living in the Eurodollar's world, and that, my friends, is why the yen is sinking, why Japanese households are getting crushed, and why we should all be preparing for more payback as the global economy, the globally synchronized economy, becomes more, not less, certain. And we can see the same types of things for U.S. households through the U.S. housing market. Prices, the changes, and behaviors that are going on there, all of that in the video link below. As always, thank you very much for joining me. I hope you can join me on Tuesday, December 17th. There's a link in the description to sign up for a webinar. Huge thanks to Eurodollar University members and subscribers, and until next time, take care.