Interview
Will Japan bring down the world economy? | The Economist
- The US Treasury Secretary executed a $5 to $10 billion yen purchase using euros to curb weakness, following a previous $73 billion unilateral intervention in May, as Japanese officials coordinate efforts to stabilize the currency due to inflation above 2% and rising import costs.
- Prime Minister Takeuchi Sanai has altered her stance on monetary policy from skepticism to support for rate hikes to address political pressures stemming from a weak yen, reversing her previous characterization of such hikes as "stupid."
- Despite a four-year period of inflation above 2% and low growth, the Bank of Japan is expected to increase interest rates from the current level of approximately 1% to 1.25% later this year, potentially reducing the yen's appeal as a low-cost funding currency for carry trades.
- A potential unwind of large-scale carry trades could trigger global sell-offs across Japanese stocks, other Asian equities, and US technology stocks, which are currently valued significantly higher than they were two summers ago.
- If the carry trade is not gradually unwound, the speaker warns it could destabilize the global financial system, while cross-border capital flows are already reorienting along geopolitical lines.
- The Japanese government retains substantial foreign reserves and the ability to coordinate with the US, providing levers to avert a crisis if the August 2024 volatility episode were to escalate, though the speaker notes uncertainty regarding the post-crisis financial system structure.
- The speaker maintains that while governments are generally effective at fighting crises, there is a risk that confidence in averting disaster could mask underlying vulnerabilities similar to those preceding Japan's 1980s bubble burst.