In the sea off eastern Japan one of the largest earthquakes ever recorded erupted in March 2011 and created a tsunami of up to 40 metres high that killed more than 24,000 people when it struck land.<\/p>\n
The biggest danger was that seawater swamped the Fukushima Daiichi Nuclear Power Plant. Three reactors suffered meltdowns, radioactive water escaped into the surrounding area and everyone worried about a nuclear Armageddon.<\/p>\n
The tsunami inflicted economic damage estimated at US$200 billion. Japan\u2019s economy plunged into recession and Japanese stocks slumped. But the yen soared to a record high when, for seemingly emotional reasons, Japanese repatriated capital. To help Japan\u2019s export sector stay competitive, the US sold yen, which was then trading around 80 to the US dollar.<\/p>\n
Go back to 1998 when Asia was embroiled in a financial crisis. Amid global efforts to stabilise Asian economies, the US purchased yen to arrest a slide that took Japan\u2019s currency close to 148 to the US dollar.<\/p>\n
While Japanese authorities have regularly intervened in yen trading, especially of late, these episodes are the only times the US has sought to influence the yen\u2019s value since the currency was floated in 1973, by Reuters reckoning.<\/p>\n
Two US yen interventions in 53 years is the context to place news on Monday 3 August that the US, the Friday before, had unexpectedly supported the yen, which had fallen to a 40-year low of 163.99 on 23 July \u2013 unexpectedly except that photographers at a US media conference that Friday snapped the to-do list of US Treasury Secretary Scott Bessent that included: \u2018Buy Japanese yen (JPY) $5-10 bil\u2019.<\/p>\n
Just think that of all the crises since the early-1970s, only the tsunami of 2011 and the Asian financial crisis prompted Washington to help manipulate the yen. As in, not the stagflation of the 1970s, nor the bursting of Japan\u2019s asset bubble in the early-1990s, neither the global financial crisis nor the pandemic.<\/p>\n
What\u2019s the emergency now? The problem is Tokyo\u2019s debt, which stands at around 204 per cent of Japan\u2019s GDP, a record for an advanced country. Investors are worried Japanese interest rates are rising to levels that might break Tokyo\u2019s budget. That\u2019s undermining the yen to the extent Tokyo has sold US assets to support the currency. The US is intervening because Tokyo\u2019s selling threatens Washington\u2019s finances.<\/p>\n
The back story to the Japanese-US efforts to support the yen \u2013 and promises of more aid if needed \u2013 is that Japan\u2019s economic stagnation of recent decades prompted Tokyo to run endless budget deficits. At the same time, to suppress government borrowing costs, fight deflation and support the economy, the Bank of Japan (BoJ) pursued a radical monetary policy that kept interest rates low, even negative.<\/p>\n
Japan\u2019s lax fiscal and monetary policies were always unsustainable and investors see that these strategies are unravelling now. Prime Minister Sanae Takaichi has massive spending plans to boost economic growth that will further strain Tokyo\u2019s budget and add to debt while higher energy and commodity prices due to the Iran war are adding to inflation.<\/p>\n
Policymakers and investors see that a yen undermined by concerns about Japan\u2019s creditworthiness and the country\u2019s low interest rates compared with those in other advanced countries will, via higher import prices, fan consumer inflation in Japan that already stands at 1.5 per cent. The BoJ in July warned inflation will exceed its target of 2 per cent before the year\u2019s end.<\/p>\n
Faster inflation prompted Japan\u2019s central bank in June to lift its cash rate to a 31-year high of 1 per cent and more rate rises are expected. But the rate increases so far were too late and too timid to squash inflation \u2013 the real rate is still negative. The BoJ is hesitant because it does not want to hurt the country\u2019s weak economy and a higher cash rate means higher short-term bond yields. But concerns about faster inflation have instead bolstered longer-term yields such that 10-year Japanese government yields are at a 20-year high of around 2.9 per cent.<\/p>\n
Whatever the BoJ does or doesn\u2019t do, Tokyo will need to pay more to refinance its debt; this when servicing Japan\u2019s national debt swallowed 25 per cent of Tokyo\u2019s expenditure in fiscal 2025, and is heading higher.<\/p>\n
Climbing Japanese interest rates worry the world because Japanese could sell some of the US$7.3 trillion of foreign securities they hold as \u2018portfolio investments\u2019 or \u2018direct investments\u2019 to capitalise on better returns at home. Such selling could rattle financial markets in other spendthrift and indebted countries.<\/p>\n
Washington, for its part, is concerned Japanese investors will sell some of the US$1.2 trillion of US stocks, US$300 billion of corporate debt or the US$1.2 trillion of Treasuries they own. Japan is the biggest owner of US government bonds. Washington\u2019s worries swelled in recent weeks when the BoJ sold US Treasuries to stem the yen\u2019s slide. US officials are worried enough about the US bond market to have sold euros, not US dollars, to support the yen.<\/p>\n
US officials need to protect US Treasuries because Washington\u2019s debt at just under US$40 trillion, more than 120 per cent of US GDP, has helped boost the yields on longer-dated US Treasuries to 19-year highs \u2013 30-year Treasury yields recently topped 5.3 per cent.<\/p>\n
The joint Japanese-US support of the yen to counter \u2018disorderly movements\u2019 as Bessent and Japanese Finance Minister Satsuki Katayama couched the action is likely only a short-term fix. Japanese policymakers are snookered because any decision risks backfiring.<\/p>\n
Japan\u2019s debt torment was a long time in coming. The country is a warning to all over-indebted governments that unsustainable finances are unsustainable, especially when a bond and currency crisis in one country spills over so easily into indebted peers.<\/p>\n
To be sure, Tokyo understands the risks of its debt burden and has embarked on a medium-term debt stabilisation policy. But that\u2019s too vague to reassure bond investors. Tokyo\u2019s net debt is much lower than its gross debt. But that\u2019s because the BoJ owns about half Japanese government bonds on issue through its quantitative-easing programs. Multinational action can curb many a crisis. But not all. A more durable approach by Washington to steady US bond markets would be to reduce the US budget deficit from 6 per cent. No chance of that though.<\/p>\n
Tremors triggered by Tokyo\u2019s excessive debt are apparent in Japanese financial markets. The danger is they could form a financial tsunami that heads elsewhere, if not everywhere.<\/p>\n","protected":false},"excerpt":{"rendered":"In the sea off eastern Japan one of the largest earthquakes ever recorded erupted in March 2011 and…\n","protected":false},"author":2,"featured_media":862880,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[64,63,99,164],"class_list":["post-862879","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-au","tag-australia","tag-business","tag-economy"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/862879","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=862879"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/862879\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/862880"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=862879"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=862879"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=862879"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}