America Takes a Side in the Yen's Collapse
Two weeks ago, Treasury Secretary Scott Bessent's to-do list had just one item on it...
"To Do," the note read, "Buy Japanese Yen (JPY)... $5-$10 billion."
Reporters caught a glimpse of the note during a cabinet meeting on July 31. Bessent later confirmed that the to-do list was a bit of political theater. "I just wanted to make sure that all the reporters looking on over my shoulder also knew the symbol JPY for the Japanese yen," he told CNBC.
But that didn't mean he was bluffing. On August 3, Japan confirmed a joint yen intervention with the U.S... worth nearly $96 billion.
This marked America's first step into the Japanese currency market in 15 years. But generational moves in the yen are leaving Washington with little choice.
Last month, the yen touched a 40-year low against the dollar. That meant a single dollar could buy more yen than at any time since 1986.
The currency's weakness is a genuine pain for Japanese consumers. It costs more than ever for the country to import goods. Small and midsize employers are getting squeezed, and consumers are dealing with a once-in-a-generation loss of buying power.
But the yen's weakness isn't just an issue for Japan... It's a headache for the U.S., too. Japan holds the most U.S. debt of any other country. If Japan has to fund more yen purchases, it might need to sell off U.S. Treasurys to do it.
According to Bessent, a falling yen is even a potential threat to global economic stability. As he explained...
I think a stable yen is not only important for the U.S., but it's very important for the entire region, because if the yen were to weaken substantially, then the other currencies would follow it.
But one problem is weighing on the yen... and it has everything to do with interest rates.
The Bank of Japan has suppressed interest rates for many years. As of June, it hovered steadily at 1%.
That's well below the U.S. Federal Reserve's range of 3.5% to 3.75%. And this spread gives traders an easy way to make money.
The strategy goes like this... Traders borrow yen at a low rate, then convert the yen to dollars. The dollars buy higher-yielding assets, like U.S. Treasury bonds. That way, traders can pocket the extra yield and let it compound over time.
This popular strategy is known as the "carry trade." But Washington and Japan just sent a big signal that this free lunch could be coming to an end.
Following the July bailout, the yen screamed higher – putting a squeeze on carry traders. Take a look...
The yen soared 4% against the dollar in four trading days. That's a massive move for any currency... And the U.S. has signaled that it wants to see a long-term floor under prices.
If the yen reversal continues, investors around the world need to plan accordingly. Japanese markets will climb if a currency tailwind appears.
But if the carry trade comes under too much pressure, it could lead to a bout of global volatility.
America's support for the yen represents a critical moment in foreign exchange markets. With the first joint yen rescue since 2011, the currency's bear market could be ending.
Bessent's to-do-list stunt won't fix the yen overnight... But it's a warning shot for anyone betting against the currency.
Good investing,
Sean Michael Cummings
Further Reading
"Real risk isn't what you see," writes Rick Rule. "It's what you think you understand but don't." Investors mistake volatility for risk... But all assets go through booms and busts. With better understanding, you'll find opportunities while others flee the market.
China's AI breakthroughs could mean trouble for U.S. chip investors. If businesses start choosing cheaper Chinese AI models, hyperscalers could have less reason to keep pouring billions of dollars into data centers... And that could be disastrous for the chip sector.
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