Interview
Will Japan bring down the world economy? | The Economist
- The US and Japan conducted a joint currency market intervention, marking the first such US action in three decades; US Treasury Secretary Scott Bessent purchased ¥5–10 billion worth of yen, utilizing euros as the funding currency.
- The scale of the intervention was disclosed theatrically via a photographed cabinet meeting notepad listing the order to "buy Japanese yen (JPY)," ranging from $5 to $10 billion.
- Japan had previously executed a $73 billion unilateral intervention in May and has intensified efforts to stabilize the yen, which had become a domestic political liability rather than an export boost.
- Japanese Prime Minister Sanae Takeaki shifted her stance from opposing interest rate hikes to supporting them, citing the negative impact of a weak yen on import costs, consumer purchasing power, and tourism-related inflation.
- The Bank of Japan has raised interest rates from -0.1% to approximately 1% following four years of inflation above 2%, with a further hike to 1.25% anticipated later this year.
- Japan remains the largest global holder of US treasuries, making its current status as a primary funding currency for the global "carry trade" a critical node in international financial markets.
- Analysts warn that rising Japanese interest rates could force a rapid unwinding of the carry trade—where investors borrow cheap yen to buy higher-yielding foreign assets—potentially triggering global asset sell-offs.
- Systemic risks are heightened by record-high stock market valuations and increasing geopolitical fragmentation, which could accelerate cross-border capital reorientation if the yen carry trade collapses.
- Optimistic scenarios suggest that the Japanese government possesses sufficient levers to prevent a crisis, including significant foreign reserve stocks to defend the currency and the ability to monetize assets on its balance sheet.
- The volatility observed in August 2024 is characterized as a warning signal rather than a catastrophic event, with no systemic collapse occurring despite the exposure of financial fragility.