Why a Weak Yen Is America’s Problem

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2:02Bloomberg Audio Studios. Podcasts. Radio. News. Investors are watching the currency markets with bated breath this week as a historic high-stakes intervention by the U.S. and Japanese governments sends shockwaves through the global financial system. At the center of the storm, the Japanese yen. A quick look at the yen as Japan and the U.S. warned of further coordinated action. The U.S. and Japan warned they won't hesitate to defend the currency further. We haven't seen something like this in, what, 15 years? President Donald Trump said the joint intervention was a signal of Washington's friendship with Tokyo.

2:42They have a weakening yen, and they wanted a little bit of help. And we're always there for Japan. The Japanese yen had been slumping for months, hitting a 40-year low against the U.S. dollar. Treasury Secretary Scott Besant raised concerns about the yen volatility earlier this year. And currency traders have been on high alert for the U.S. to step in to support the yen. But the most telling clue that the U.S. might make a move came at a cabinet meeting last Friday at Camp David. It's an honor to be here in this historic place. During that meeting, a photographer looking over Besant's shoulder spotted something that caught his eye.

3:20A photographer from Reuters captured an image of Scott Basson's notepad. And scribbled across the page were a few words that would soon grab the attention of investors around the world. The notepad clearly displayed underlined words to do, and on it it showed, buy Japanese yen, 5 to 10 bill. That's Bloomberg's Ruth Carson. She covers Asia's foreign exchange markets from Singapore. The U.S. stepped in to buy the Japanese yen on Friday. Ruth says it was a rare move. The U.S. has intervened in the market for the Japanese yen only twice in the last 30 years. The fact that you've got the U.S. essentially coming in a way to Japan's rescue shows that this is not just a Japan problem any longer.

4:15This is The Big Take Asia from Bloomberg News. I'm Wan Ha. Every week, we take you inside some of the world's biggest and most powerful economies in the markets, tycoons, and businesses that drive this ever-shifting region. Today on the show, Japan and the U.S. play tag team to rescue the yen. What's at risk for American consumers if the plan doesn't work? and why a weak yen is a problem for the global economy, not just for Japan.

4:50Ruth, to understand what's happening this week, we actually need to flash back to Japan in the 1980s. Can you paint a picture of Japan's economy then? In a word, booming. The Nikkei gained more than 450 % over a decade. It was explosive. Interest rates were still low. Banks were gangbusters in terms of landing aggressively. There was optimism about the Japanese economy. So that fuelled a frenzy of buying stocks, property, and then suddenly it came crashing down. In 1989, the Bank of Japan raised interest rates in a big way. Over the coming months, rates went from 2.5 % to 6%. It was a mental, crazy increase.

5:40And suddenly, almost overnight, borrowing became so much more expensive. Credit growth and the banks that were happily landing just nose-dived. How did that long period of economic stagnation affect Japan's interest rates? So it went on for decades. one piece of action over the period of months, a year, ended up being decades of lost growth. The BOJ eventually cut rates to zero, tried to revive growth, and Japan became the pioneer in zero interest rates to try and bolster the economy. But it wasn't until recently that we've seen Japan begin to normalize. After decades of deflation, the Bank of Japan has come under pressure to cool inflation.

6:34In March 2024, the central bank exited its zero rates policy, raising interest rates for the first time in 17 years. Including that move, the BOJs raised interest rates five times in total. Where are Japan interest rates today, about 1%. Okay. US versus Japan, the interest rate gap at the moment is 275 basis points. Against Australia, it's 335 basis points. With emerging markets, with Indonesia, for example, there's a 475 basis points difference. With Brazil, it is over 1 ,300. That's crazy. So Japan's interest rates are very, very low compared to the rest of the world. Correct. As much as a journalist, I write about Japan raising interest rates as a trader, you will look at it and go, uh, you know what?

7:35That carry trade to buy something like US Treasuries or that wind farm in Europe or, you know, the Cosby Korean stocks. I'm better off putting my money where I'm going to get growth. And if I'm going to get a cheap funding currency to fuel that bet, absolutely, why not? And that currency is the yen. And how does that borrowing in yen and investing overseas put pressure on the yen? So to answer that question, you need to understand the size of this carry trade investment. By some estimates, it's over$4 trillion US dollars, bigger than the size of India's economy, that is invested offshore. So investors are selling the yen, trillions of dollars of it, in order to fund investments offshore that are getting them more bang for their buck.

8:32What does that mean for the yen? It means continued pressure. So these low interest rates are really locking in that pressure for the Japanese yen. I wonder if you can tick through some of the other factors weighing on the yen. Okay, so if we take a macroeconomic look at Japan, it's not just the carry trade, which is obviously fueled by interest rate differentials. Japan's national debt is over 200 % of its GDP, by far the highest among developed economies. On top of that, you've got the ongoing Iran war. Remember, Japan is a huge importer of energy from the Middle East. And if your import bill is higher because of the war, that only fuels inflation problems in Japan.

9:19And if the BOJ is seen behind a curve to raise interest rates to combat said inflation, the yen is another release or escape fall for investor angst. And one critical component to this story of a weak yen is also the impetus of local investors to invest offshore. You've got pension titans, life insurer titans that are some of the biggest investors in the world. And they have liabilities to match. They have to pay people their pensions. If inflation is eating into your returns, do you have an incentive to pull that massive amount of money offshore back home? or do you hedge your bets and continue investing offshore and take only some of that money back onshore?

10:06All this is not good for the yen. Now, there are pros and cons of a weak yen for Japan, right? Absolutely. It becomes more desirable, isn't it, to visit a destination like Tokyo or Kyoto. But there's equally lots of cons as well. Well, yeah, and especially if you are a Japanese consumer, if you're living here in the country, you're feeling the pain of that weak yen, right? Absolutely. Import costs and household expenses are soaring. Small businesses are getting squeezed as well. And that's why we've seen some of the policies that have come through, right? From Prime Minister Sanae Takeuchi with tax initiatives to help with that cost of living.

10:50So that high cost of living has become a huge issue here in Japan. And that's also contributed to really the downfall of the two previous prime ministers. Absolutely right. Voters will vote. And if they are feeling the pain that's stemming from a weak yen, absolutely, we have seen the downfall of prime ministers, leaders who have failed to address voters' pain and concerns.

11:27This isn't the first time that the Japanese yen has needed support from its government. After the break, we'll find out why the U.S. feels the need to get involved this time around.

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12:41Bill, why is my eye twitching? Does this mean I'm in perimenopause? Maybe I have adult ADHD. I need to look this up. Where's my phone? Juliana, your phone is hot to the touch. I think it's asking you for a break. You know what? Maybe I should just ask ChatGPT. Or maybe we can ask an actual human. Yes, like a couple sex therapist. Whoa, that escalated quickly, but okay. Because I have questions. We have questions. And I bet everyone has questions. Like, is it normal to sleep in separate bedrooms? We do that. How about this one? Is bribing your kids bad parenting or just negotiating? Oh, and I still do need to know, why was my poop green that one time?

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14:18The Japanese yen has needed a lot of support recently. Bloomberg estimates that the Japanese government has been spending significant amounts to prop up the currency, almost$74 billion in April and more than$80 billion over two days at the end of last week. It's still unclear how much Washington has actually spent to help lift the yen from its four-decade low. The joint intervention was likely larger than those undertaken in 1998 and 2011, when U.S. contributions didn't surpass a billion dollars. Bloomberg's Ruth Carson says the huge U.S. purchases show that a weak yen isn't just a problem for Japan.

15:00So the currency market trades at$9.5 trillion a day. A day. So we're talking the biggest asset class in the world. The yen is the third most traded currency every single day in the world. That shows you the amount of capital that's sloshing about when it comes to yen bets. So if something goes awry with the yen, for example, in this case, it's ultra, ultra weak. Its impact isn't felt just in Tokyo or on shore. It's a problem that can fester as far away as Jakarta through to Sao Paulo. So a couple of key points to note. Japan, for example, is the largest foreign investor of US treasuries in the world.

15:55If they start selling to fund efforts to prop up the yen, it pushes down the price of US bonds, it pushes yields higher, and that means higher borrowing costs for the US. Suddenly, it's no longer just that homeowner in Tokyo that's feeling the pinch. If you have higher treasury yields in the US, say in the 30-year, that's impacting that New York mortgage holder. That's right. And on top of that, we talked about the yen carry trade and it's trillions of dollars around the world and it's cemented. Right. So we saw that. We saw that happen in August 2024 when the yen suddenly surged and wiped out profits of hedge funds, stock investors, credit investors were trembling.

16:44And it's impactful to the point where it can destabilize global markets. What does it mean for government to intervene in the currency markets? How does that actually work in practice? In this case, the chain works like this. Japan sells dollars, which could be backed by assets like treasuries, U.S. treasury bills, to bolster the yen. So Japan's finance ministry decides to intervene. We're acting now. The BOJ, the Bank of Japan, will act as its agent. And Japan sells US dollars from its FX reserves. It uses the dollar to then buy the yen. To put this into context, Japan has more than$1 trillion in FX reserves.

17:35That's a ton of firepower. Goldman Sachs in May, after April's intervention then, said that Japan could intervene about 30 more times at its April intervention size. And Ruth, how effective were these interventions? What happened to the yen after Japan's government intervened in April? Okay, so the yen weakened past$160 per dollar. Japan then conducted a yen buying operation on April 30th, according to people familiar with the matter, and dollar-yen plunged. It went from around 160 to 155. Huge, huge moves and wiped off a lot of that bearish yen sentiment. Did it work? In short, no, because they had to intervene again recently.

18:32Dollar-yen continued to creep higher, and it comes down to that rate differential story again. So investors came back and they just kept coming back to sell the yen. What's your take, Ruth, on what's different about this latest intervention? So the U.S. involvement is historic. It's decades since we had seen anything coordinated like this. But the fact that you've got the U.S. essentially coming in a way to Japan's rescue shows that this is not just a Japan problem any longer. That sends a strong signal. Whether or not markets heed it is something else altogether. But the fact that they have come out to work together is highly, highly significant.

19:24What's been the message on continued interventions? Is this the last of it? So if we listen to Donald Trump, who's obviously underlined that friendship with Japan, which kind of, in a way, sort of lends heft to further intervention efforts. At the same time, you've got the Finance Minister of Japan coming out to say that there will be, there could be further coordinated intervention. So that definitely puts investors on high alert. This may not be a one-off. It is likely not going to be a one-off when that rate differential story is still very much in play. And Ruth, what does a successful intervention look like for the markets?

20:09It's hard to answer that again because it hasn't worked. So successful intervention, one would say, is where the yen does not only strengthen, but keep its strength, where you will get investors in Japan and megafunds coming out to say, we are buying Japanese assets en masse once more. We are bullish on the yen. And that sends strong signals to the rest of the world that, hey, you know what? It worked. We are now believing the story of a stronger yen. But I don't see firm evidence of that just yet. And what do you think needs to happen for Japan to wean itself off of the need for these interventions?

20:54Raise interest rates and raise it fast and high without destabilizing one of the world's biggest and most important economies. When I speak to investors, when I speak to traders, the number one reason they cite as to why they're selling the yen is because of Japan's wide interest rate gaps with the US and the rest of the world. Now, remember, we can debate about Bank of Japan policy and how careful they are, and they have to be, without destabilising their own economy and balancing a weak yen. So they have their reasons to act the way they do. But while the Japan interest rate gap with the US is so large, investors will still return to it and go, that's a juicy trade right there to keep selling the yen.

21:53This is The Big Take Asia from Bloomberg News. I'm Wan Ha. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. If you like this episode, make sure to follow and review The Big Take Asia wherever you listen to podcasts. It really helps people find the show. Thanks for listening. See you next time.

22:22Thank you.