Is the U.S. Secretly Bailing Out the Japanese Yen?!

Is the U.S. and Japan coordinating in bailing out the Japanese yen? Because the Japanese yen, despite all previous interventions, continued to weaken, got past 163 to the dollar, lowest exchange rate since maybe biblical times. It's been a long time since Japan yen has been this low, which has got people in Japan as well as in the United States and around the rest of the world, given the importance and prominence of the carry trade, very concerned about the yen being weaker. So now we have more intervention and hasn't been confirmed through official channels, yet estimates are another $53 billion in reserves wasted and thrown down the toilet and set on fire. Except this time it did move the yen from 163 thereabouts into the 159 range with the help and assistance of U.S. officials. At least that's the idea. There is now more determined coordination between what the U.S. is doing and as far as helping the Japanese try to rescue the yen. And it raises a bunch of important questions, including is the U.S. trying to help Japan bail out the yen? But more importantly, why do they feel they need to have to keep doing this? And why do all of these tactics keep escalating? That may be the most important question of all. That's why we have Mr. Steve Van Meter here. Steve, we've got more intervention in the end, not a surprise to us, but now we've got these rate checks, coordination, and the idea that the U.S. government and the Japanese government are going to continue coordinating as if maybe that will help strengthen the yen or maybe not even strengthen the yen, but at least stabilize the yen so it stops getting weaker and weaker and weaker. You know, Jeff, I think there's this notion that the U.S. government is, you know, dumping dollars. And that's what the perception is. But it is far from even the truth because we're not doing that. And there's no evidence we've ever gone out and done that to help Japan out. But there's this idea that if there's some sort of coordination or maybe backroom deals that maybe you can get all these people that are short the yen. And that's really the issue here is that, you know, the broad belief is there's all these speculators, all these evil hedge funds are massively short in the yen. And if we could just squeeze them out of their positions, that currencies would normalize. And of course, we know that President Trump wants a weaker dollar to boost exports. We know Japan wants a stronger yen because they're worried about inflation. So if you can just convince the world on whatever side these trades are on to squeeze them, and you hear this from central bankers and policy makers all around the world, it doesn't matter what the government is or what the currency, there's always somebody who's shorting their currency or doing something they don't like. And all you have to do is just squeeze them out of their position. So in this case, what do we have? These backdoor alleged communications, coordinated policy, calling up the banks and saying, you know, what is the rate? And does it work? Well, it does briefly. Of course, we also know that Japan, as you said, is burning reserves here because the market knows that Japan does not have an infinite supply here to keep doing this. And that ultimately what happens is every move gets reversed each and every time. Japanese yen seems very undervalued to me. The currency is very cheap. The economy is doing well. The prime minister is very popular and enacting very strong policies. And I think we're going to see the fundamentals come through at a point that the market will realize the yen is undervalued and should strengthen. So the tactic now is, Steve, at least what it appears to be, what we can push piece together. There's pretty, pretty good evidence that the Japanese intervened on Thursday in the aftermath of the Fed meeting, which had the U.S. dollar exchange value weaker anyway. We saw the Japanese do this before back in 2024. They made some moves where they intervened, where the dollar was already weakening to begin with. The yen was strengthening and they tried to really ride that wave and amplify that wave into a one day big, big time move, which actually took place. But as Steve's saying, these interventions don't work outside of the short run. So it seems like authorities are stepping up their tactic or at least stepping up their strategy here, not tactic, actually strategy. The strategy appears to be, OK, we do it one time. It doesn't work. It produces a big jump in the chart. The yen rebounds three, four percent in a single day. And then over the next couple of weeks, it starts to weaken again and weaken again. And before you know it, it's even weaker than it was when we started the intervention. So the one time interventions haven't worked and they're never going to work. So it seems like they're they're escalating the strategy to now be, OK, it's not going to be a one time intervention. What we're going to kind of threaten to do is to have constant coordination between the U.S. government, the Japanese government and maybe a bunch of other people beside that we don't know about. But for the time being, the idea is, OK, no more one offs, no more Mr. Nice Guy about these speculators. Now we're going to work with the U.S. government closely and continuously and to see if maybe that has that does the trick and gets the end to stick around at least some kind of level that they're they're they're they think is acceptable. Now, we all know how much time goes into taking a complex topic and turning it into something that's actually useful to people, whether it be building a presentation or creating a client document, organizing your research or taking that rough idea and making it into a polished final product. 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So if you want to turn ideas, notes or research into something polished much faster, highly recommend you check out Gamma. There's a link available for you to do that. It does work in the short term because we saw it work the other day, you know, the yen jumped, the dollar went down. And what is exactly what you said is going to happen is exactly what's going to happen. All those people that maybe got squeezed or had a second thought about their position, they're going to come right back in and say, hey, look, I get I get a better entry point and let's do this again. And it's just rinse, repeat over and over. Yeah. And it's funny, too, how the Japanese authorities, in addition to this, they're actually making more sense. We talked about this, I think, last week or the week before, how the Japanese are kind of getting the carry trade idea in understanding that, you know, at first what the textbook teaches us is that exchange rates and exchange values are driven by policy interest rates, right? If the central bank raises its policy interest rate relative to another one, in this case, if the Bank of Japan raises its policy rate relative to the Federal Reserve, then all of this money, the savings around the world are going to come flooding into Japan because on a relative basis, the U.S. and Japan are relatively considered to be equal as far as risks go. But you give the Japanese end of it a little bit better return. Suddenly that makes the Japanese investments more appealing. Therefore, money flows into Japan. Then the exchange rate, instead of weakening yen, you get a strengthening yen. That was what the textbook said. And that's what the Bank of Japan has been doing for a couple of years now since they started raising rates. The idea was we'll get rates to go up and then that will help strengthen the yen or at least stabilize the yen. They don't necessarily want it to strengthen. They want it to at least stop falling. But that didn't work. As closer as whether it's central bank policy differentials or market differentials, which are far more powerful and relevant, JGB yields have really jumped pretty substantially. They've closed the ground between JGB yields and U.S. Treasury yields, their equivalent counterparts. And yet the yen continues to weaken anyway. So I think there is a couple of things here. One of the reasons what's driving this new coordination, this new strategy, is realizing the old playbook hasn't worked and it's not going to work. We tried direct intervention. We tried interest rate hikes. We've tried jawboning. We've tried a whole bunch of other things. They don't seem to work. Now they're ramping up the game because I think this is a big important point. They realize that the yen is kind of hanging by a thread here. And if the yen does manage to fall a little bit further, there is a very substantial risk that the yen doesn't just go down a little bit more in a straight line. It gets to a point where it just kind of falls and falls rapidly. That's what I wanted to ask you, Steve. I wonder if you had a sense of whether or not, if you kind of see that worry in the idea that Japan and the U.S. are going to start coordinating more, are they really concerned about, hey, we tried it, it's not working, and maybe there's a knife's edge, cliff's edge up ahead for the yen? Well, I think, Jeff, it's not just a cliff edge for the yen, it's a cliff edge for the entire Japanese economy, which is exactly what the yen is telling everyone is, hey, all this stuff we're doing isn't worked and isn't working. It hasn't worked. And right now we're facing high inflation, high energy prices, and high interest rates. And, you know, Jeff, I think an economy can handle one of those at a time. Two, if you're fairly robust, but you give consumers and businesses all three, and it can't handle it. And that's the issue here is Japan's got all of them. And all the central bank's been doing is telegraphing that we're going to keep raising rates. And everyone's like, great, well, we'll just keep dumping bonds while you do that. And we'll keep moving our money out of the country. And the yen's going to continue to weaken. So the problem here is the central bank is literally the one that's created this whole mess. And now they want to stop it. But the problem is they can't change their tune because they don't know what else to do. The problem is it isn't about the currency. It's not about interest rates. It's about the Japanese economy and the fact that it's not that strong. And the problem is it's not just the Japanese economy. We can look around Europe and Asia and the U.S. and all over the world. And what do we see? The same thing that's happening there in Japan. This are all showing up in other economies. We're just all a little behind them. I think the fear is Japan's economy falls off a cliff. Watch out. You know, this isn't going to be like the past where the rest of the world holds them up. This is going to be where as one goes, the next domino is going to fall. So the idea here, what the currency is really telling us and what Steve is actually describing is the concept of risk adjusted return. So, yes, on a ceteris paribus basis, if interest rates go up in Japan for whatever reason, whether it be policy or just market forces, and what happens is money would flow to Japan because on a risk adjusted return basis, the risk doesn't change, but the return goes up. So therefore, it's a better bet in money flows into Japan. But what Steve is describing is not just the Japanese economy, but the Japanese fiscal situation, demographic challenges. There are a number of risks in Japan that only get worse and worse and worse. So on a risk adjusted return basis, you look at Japan and say, yes, they're offering higher nominal returns, nominal returns, but the risk adjusted returns keep going down because the risk component keeps going up. And that's what we talked about in our last time we talked about the yen, right, Steve, is that the Bank of Japan's rate hikes are actually working against them because the more the Bank of Japan threatens to hike rates and then actually carries it out at the short end of the yield curve, it's leading, as Steve just said, to big Japanese bond holders abandoning Japanese bonds. So on a risk adjusted return basis, Japanese government bonds offer less and less risk adjusted return because the risk of investing in Japanese bonds has gone way up, which means even less, even less reason to invest in Japan, which weakens the currency. And so the Japanese are doing themselves no favors because they haven't up until this point really confronted the main problem, which is that key concept, risk adjusted return. And the risk part of it more than the return part of it is in control here. Yeah. And then you look at the government and what do we hear from them recently? It's like, hey, maybe we should have spoken to the Japanese bond market as if you just pick up the phone and go, hey, is this the JGB hotline? I just want to know what you think about what's going on here. But the notion is that even the government knows the economy isn't good. And why is that? Because, hey, they're borrowing and doing deficit spending. They're trying to trim taxes here and there. It's all telling the markets that, hey, the economy is going the wrong direction. The government's desperate and panicking. And the problem is the market's trying to tell them very clearly what you're doing isn't going to work. So what we're going to do is we're going to penalize you. You want to borrow and spend? Fine. You can pay these higher interest rates, but it's not going to work. And that's kind of the incentive here is to get the government to not do these things. Every move these central bankers make, these politicians make, political elites, doesn't matter what it is. The market's like one step ahead of them here, Jeff. And this is just a clear case that it's the global economy is the issue. It's not just Japan. It's just all over the world. Things are going in the wrong direction. Those in charge don't know what they're doing about it. They don't have a solution. They've never had a solution. And the market's saying, look, it's time to pay. Yeah, the solution is always Einstein's definition of insanity. It's do the same thing over and over again. You're exactly right, Steve. The idea from the Japanese government perspective is, OK, we're going to spend a little bit more money, more fiscal stimulus. Or in this case, they're talking about, as you said, tax cuts. We're going to cut the consumption tax here, a consumption tax there. And the market hears that. It's not really about the fiscal deficit so much as it is, oh, you're doing the same thing that didn't work again. That sends a very clear signal to the marketplace that, first of all, you have no new ideas, so you really don't have any solution. And number two, you're reacting to something that's relevant to what the marketplace is talking about, what the marketplace is pricing. So the fact that you feel the need to stimulate the economy tells me that you also agree that the economy needs stimulus, which, again, going back to our key concept here, risk adjust to return, everything the government does just validates the idea of only increasing risk. And increasing risk, as Steve, you're just pointing out, in every single direction you look, Japan doesn't really have a whole lot going for other than maybe the Nikkei. But even the Nikkei and the AI bubble that's hitting Japan is an offshoot of this, too, because where you think, OK, where are the risk adjusted return? We're the only place the risk adjusted returns make sense in Japan. Well, it's where risks are huge, but the potential returns from the AI bubble are even bigger. So money flows into the Nikkei because basically that's the only place where it looks like you might have a chance to make out on a risk adjusted return basis. So even the Nikkei's rise, which also raises the risk profile of the entire Japanese system should the Japanese stock market suffer another correction like it did in the summer of 2024. So in every direction you look at, Japan just screams risk, risk, risk. So no wonder their currency continues to tank no matter what the government does or what anybody talks about or any coordination between two people, two governments, two officials, anything else in between. And Jeff, like you said before, why is there this persistent downward pressure on the yen? You have these big insurers, these big financial companies that are taking in yen in terms of premium and money flowing into their firms. And they're looking, as you said, at risk adjusted returns and say, look, do I want to invest in Japan? Now, in some cases, we're going to invest some of the money here, but we're certainly not going to invest all of the money here. We can take it elsewhere and get a much better deal. And so it's that persistent selling of the yen, moving into other currencies like the dollar, investing in the US markets or wherever in the world they're looking at that is not Japan that continues to put downward pressure on the yen. And then the government comes and says, well, maybe we're going to force you to keep your money here. Of course, we know they can't do that. They're not going to do that. Companies probably wouldn't listen to them anyways, but they would love to invest in Japan. It's not the issue that they don't want to, because as you said, the opportunity and the risk there is so low, particularly when you have to generate money for premium. You can't say, hey, you know what? That life insurance policy wants out three times the cost because we have to invest in Japan and we can't get the yield we want. Well, that would be bad for business. So again, all this money has to flow elsewhere to get yield. Of course, the problem is, as you also mentioned, is right now everything's hinging on AI. If that bubble weren't to ever burst, well, then you've got some even bigger problems. Let's talk about the other part of this too, because that's just as important. What's in it for the US? Why would the US trying to be, as I put it, why would they help the Japanese bail out the yen? Because that's a key component as well. I mean, the US government has made a statement. Let me read here the statement that came out from the finance minister in Japan, Katayama. Besant, one of the most knowledgeable experts in the markets, and that's debatable, has stated that the economic and fiscal policies of our Takichi administration will lead to a strong Japanese economy. Here's the important part. He is sending a very clear message that once these policies manifest as economic fundamentals, the market will recognize the yen's undervaluation, and it's extremely important that we're getting this very clear message. And so she's basically saying what Steve and I are saying, that the risk adjusted return to Japan is crap. And so the idea is that Besant and the new administration in Japan, relatively new administration in Japan, are working together on an economic solution that will prove to be gangbusters. And when it does, the market will say, oh my God, these policies work really well, and then all the money will come flooding back into Japan. So for once, I guess you could take this as a positive step. They at least identify the problem, which is huge risks in Japan and not much that has been done about it despite 10 years, 15 years now, 13 years of QQEs and all sorts of fiscal stimulus and all that. So the question is really, it hinges on, is the market verdict about whether these new policies from the Takichi government are actually new policies, or are they just something else thrown together with a new coat of paint on it, a coat of paint that was painted by Scott Besant, the US Treasury Secretary. And that's really what the market is facing, not something new, not something that's actually a solution, but just more of the same repackaged. Yeah, because tax cuts aren't new, stimulus isn't new. The only thing that's new right now is we're doing them amidst high energy prices, high consumer prices, and now high interest rates. And of course, you have no choice. You've got to do stimulus because people couldn't afford it before. Now they can't afford it today. I think when we look at the challenge here, Jeff, governments have gotten just so over-indebted that the solution is the economy's just weighted under this debt, but they don't want to admit it. So they just take on more debt, hoping that this next round, this next time, we didn't do this type of tax cut before, and this is a silver bullet. This is what we should have always done. But the issue is economies are just over-indebted, and we do need to go through a period where the debt is actually paid down. And yes, I know no one wants to think about the economy underperforming, but at the path we're going, that's where we're going to end up anyways. And these governments just are just unrealistic about the path. It's the same thing over and over, as you said, with the same poor results, but just some new way of packaging it to make everyone convinced that this is it. Yeah. So the message here, that's what they keep saying, the message, the message, the message. And the message they're trying to send is we get it. We get it. We're going to act on it. We're going to do some stuff that's very forced. We're going to coordinate with the U.S. Treasury Department. We're going to fix the yen. We're going to fix the Japanese economy. That's the message that they're sending. But the message that the market is receiving is, oh, you're actually admitting that we were right about you the entire time. The economy's terrible. It's not getting better. Your fiscal situation is deteriorating. There really is nothing about Japan other than the Nikkei temporarily that is actually worth taking a look at. So they're trying to send a message, but the message they're actually sending or the message that's actually being received is the exact opposite. So you can understand not only why the Japanese and the U.S. would coordinate together, but also why the yen continues to go down. And at some point, why there's such a tremendous risk if the yen doesn't just go down a little bit more, a little bit further on, it actually does lead to a plunge in the yen. So kind of paradoxically, the more the government does, the worse you know it is, they actually make it more likely the yen falls off that cliff. The economy moves through four distinct regimes and each one rewards a completely different portfolio strategy. So join us for a free webinar where we're going to go over how to identify which regime we're in now, which one might be coming next, and how to position your portfolio for growth, inflation, recession, maybe even deflation. Register now for the four economic regimes and how to position your portfolio for each one.