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Japan's Futile Efforts, Spending Billions to Barely Nudge the Yen

Japan's Futile Efforts, Spending Billions to Barely Nudge the Yen

May 10, 2024

Japan's Futile Efforts, Spending Billions to Barely Nudge the Yen

As the drama surrounding the Japanese yen unfolds, the nation's recent interventions in the currency market have sent ripples through the global financial system. Japan, in a bid to stem the rapid devaluation of its currency, has embarked on what many have deemed a series of "half-assed" measures, which have yielded little more than a temporary blip on the radar of a steadily declining yen.

The interventions, carried out strategically during local holidays to exacerbate the impact on yen short-sellers, saw Japan's currency briefly rally from 159 to 156 against the dollar, before slipping back to 158. A second attempt proved more dramatic, with the yen being bolstered to 153 per dollar, only to settle back to 156 and continue its upward trajectory. These market maneuvers have reportedly cost the Bank of Japan a staggering $55 billion, a sum that has done little to alter the underlying economic fundamentals contributing to the yen's freefall.

At the heart of the yen's troubles is Japan's commitment to maintaining zero percent interest rates, a stark contrast to the United States' 5% yield on debt. This discrepancy has triggered a massive exodus from yen assets to dollar holdings, resulting in a sell-off that has precipitated the yen's collapse. The Bank of Japan's interventions, it seems, are less about reversing this trend and more about mitigating the rate of decline, in hopes of softening the blow to a Japanese public whose dissatisfaction with the government is palpable, as evidenced by approval ratings languishing around 26%.

Nikkei Asia

Yet, the markets remain unconvinced by Japan's attempts to defend its currency. With finite dollar reserves at their disposal—UBS estimates place the Bank of Japan's cash holdings at $150 billion pre-intervention, with a potential additional $150 billion convertible to cash—there looms the possibility of Japan tapping into its vast international currency reserves. This could involve selling off significant portions of U.S. treasury debt, an action that could have profound implications given the U.S. deficit nearing $2 trillion and the growing global apprehension following the seizure of Russia's central bank assets.

The implications of Japan's currency woes extend far beyond its shores. As the fourth-largest economy globally, an implosion in Japan could precipitate a cascade of financial turmoil, starting with plummeting treasury prices and a disrupted yen carry trade. More broadly, Japan's situation serves as a stark warning to Western economies, many of which are treading a similar path of government spending, deficit financing, and monetary expansion. The yen's decline may be a harbinger for the financial stability of the entire Western world.

The country stands at the precipice of an economic dilemma with no apparent rescue in sight. The rest of the world would do well to observe and prepare, as the reverberations of Japan's struggle to save its currency may soon be felt across the global financial system.


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