Higher interest rates and inflation are toxic for the yen
Recently, the yen has lost value and this is attracting the attention of currency watchers. As the Japanese stock market fails to rise enough to offset the falling yen and inflation, this turn into a tsunami of money fleeing Japan and be the end of the line for those who hold both Japanese government bonds and the yen. In July 2020, an article by AdvancingTime claimed that predictions of the demise of the dollar were likely premature and exaggerated. I argue that for several years currencies have been trading in a hyper-manipulated state. It should be noted that fiat money is often sheltered from the storm of volatility both by politics and because it exists in a rather closed system.
Wealth is contained within the fiat currency system by laws and rules that discourage freedom of movement. The coordinated collusion of major central banks has allowed this charade to exist for far too long. The fact that it has not been recognized or recognized does not modify or guarantee that the system will continue. The failure or major revaluation of any of the world’s four major reserve currencies will destroy the myth that major currencies are immune to the fate that has haunted fiat currency throughout history. When the nations granting these currencies prove unable to control their budgets, history shows that their currencies are destroyed and crushed under the weight of debt.
The reason central banks have played this game is that the one thing the global economy doesn’t need with all the uncertainty floating around right now is instability in the currency markets. When you consider how destabilizing currency fluctuations can be, it’s easy to see how a strong dollar could wreck the global economy. Over the years countries have become very adept at coordinating economic policy, currency swaps are just one of the tools they use, it has even now extended to equity investment. When the dollar began to soar again in late 2014, fear began to mount and concerns grew that it was stressing countries that had large debts that would have to be repaid in dollars rather than in their own currency. This has prompted Fed Chairman Powell to attempt to pursue a path that does not lead to the strengthening and devastation of the emerging market dollar. In doing so, the Fed has created a situation that allows the dollar to use as a global prop.
For years many of us have been stunned by the failure of the Japanese Yen. Viewing the Japanese yen as a “safe haven” currency goes against reason. For years, many economists have looked at Japan’s economic trajectory and predicted an economic crisis brought on by its government’s mounting debt. The myth promoted by central banks that a major currency cannot fail is accepted as fact by many people, however, the rapid disappearance of the yen or the euro is all that will be necessary to reveal the truth and remind to people everywhere that our fiat currency system is only maintained by faith in the system and a prayer.
In mid-2016, another AdvancingTime article looked at the fact that over the past few decades, due to its size in the global economy, the Bank of Japan’s current policy has quietly and systematically distorted financial markets around the world. With extremely low interest rates, it has become a key carry trade player. In recent years, investors and megabanks have significantly reduced their holdings of Japanese government bonds (JGBs).
Much of the risk of who would be hurt in the event of a yen drop or default has shifted from the private sector to the Japanese public since the BOJ continued to splurge on the JGBs. As Japan continues down this path, it is only a matter of time before the BOJ’s credibility is lost and the yen plunges. For a long time, along with many economists, I had a low opinion of the yen and its value in the coming years, however, the timing of when it will succumb to economic reality has been unsettled due to how isolated it is and interlaced. in world markets.
The demographics paint a bleak picture for the future as Japan grapples with an aging and declining population that is increasingly costing the government. Adding to its woes, the Fukushima nuclear disaster shut down its nuclear power plants and forced the country to import more expensive energy alternatives. Overall, neither monetary policy nor fiscal policy will adequately solve Japan’s problems. Continuing to run budget deficits only means that public debt is pushed up. Simply put, Japan’s fundamentals are poor.
It should be noted that Japan would be in much worse shape if it weren’t for the wealth currently being transferred from America to the small island nation every year. America spends billions every year to defend Japan and pumps much of that money directly into the economy. Another way America supports Japan is by buying many of the goods the country produces. The massive trade deficit America has with Japan is pumping large amounts of money into Japan, without this money, massively indebted Japan would be in even more trouble.
For years it has been noted that one of Japan’s main strengths is its ability to control its own economic destiny and that it cannot be held hostage to outsiders because the people and institutions of Japan hold its debt. In the past, we have seen outside creditors wield great influence over a deeply indebted nation. Another source of its strength is rooted in the fact that Japan has close economic ties with China, the yen has even been used as a conduit to move wealth out of China.
Unlike many other major economies, Japan has struggled with deflation or falling prices for most of the past two decades. At some point, expect that to change as reality sets in. To support their stock market, the BOJ even switched to buying stocks. When Japanese government bond investors begin to believe that inflation is about to return, it would make sense for JGB owners to abandon low-yielding securities and buy foreign bonds or stocks. It’s been a long time coming, and I argue that the slow cross-border flow of money and wealth leaving Japan is why some other stock markets have remained so resilient in our sluggish global economy. When Japan collapses, it will be felt around the world and add to doubts about the entire fiat money system.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.