WEBVTT - Why a Weak Yen Is America’s Problem 0:00:02.720 --> 0:00:07.240 Bloomberg Audio Studios, podcasts, radio news. 0:00:09.760 --> 0:00:13.000 Investors are watching the currency markets with bated breath this 0:00:13.119 --> 0:00:16.960 week as a historic high stakes intervention by the US 0:00:16.960 --> 0:00:21.480 and Japanese governments send shock waves through the global financial system. 0:00:22.000 --> 0:00:25.000 At the center of the storm, the Japanese yen. The 0:00:25.079 --> 0:00:27.480 quick look at the end as Japan and the US 0:00:27.560 --> 0:00:30.440 warned of the coordinated action and intervention. 0:00:30.120 --> 0:00:32.879 The US and Japan warned they won't hesitate to defend 0:00:32.920 --> 0:00:33.880 the currency. Further. 0:00:34.080 --> 0:00:36.600 We haven't seen something like this and what fifteen years. 0:00:36.960 --> 0:00:40.559 President Donald Trump said the joint intervention was a signal 0:00:40.640 --> 0:00:42.640 of Washington's friendship with Tokyo. 0:00:42.880 --> 0:00:45.400 They do. They have a weakening yen, and they wanted 0:00:45.400 --> 0:00:47.120 a little bit of help, and we're always there for 0:00:47.240 --> 0:00:48.400 Japan Japan's. 0:00:48.240 --> 0:00:51.440 The Japanese yen had been slumping for months, hitting a 0:00:51.520 --> 0:00:55.600 forty year low against the US dollar. Treasury Secretary Scott 0:00:55.640 --> 0:00:59.760 Bessen raised concerns about the yen volatility earlier this year, 0:01:00.320 --> 0:01:02.840 and currency traders have been on high alert for the 0:01:02.920 --> 0:01:05.800 US to step in to support the yen. But the 0:01:05.840 --> 0:01:08.440 most telling clue that the US might make a move 0:01:08.720 --> 0:01:11.880 came at a cabinet meeting last Friday. At Camp David. 0:01:11.959 --> 0:01:14.440 It's an honor to be here in this historic place. 0:01:14.880 --> 0:01:18.720 During that meeting, a photographer looking over Beson's shoulder spotted 0:01:18.800 --> 0:01:20.280 something that caught his eye. 0:01:20.319 --> 0:01:25.320 A photographer from Royt's captured an image of Scott Besson's 0:01:25.440 --> 0:01:26.440 night pat. 0:01:26.120 --> 0:01:29.080 And scribbled across the page were a few words that 0:01:29.160 --> 0:01:33.280 would soon grab the attention of investors around the world. 0:01:33.600 --> 0:01:37.080 The knight peck clearly displayed underline webs today, and on 0:01:37.160 --> 0:01:41.880 it it showed by Japanese yen five to ten bill. 0:01:42.440 --> 0:01:46.840 That's Bloomberg's Ruth Carson. She covers Asia's foreign exchange markets 0:01:46.880 --> 0:01:50.360 from Singapore. The US stepped in to buy the Japanese 0:01:50.440 --> 0:01:53.480 yen on Friday. Ruth says it was a rare move. 0:01:54.000 --> 0:01:56.560 The US has intervened in the market for the Japanese 0:01:56.640 --> 0:02:00.000 yen only twice in the last thirty years. 0:01:59.760 --> 0:02:03.960 The fact that you've got the US essentially coming in 0:02:04.000 --> 0:02:08.079 a way to Japan's rescue shows that this is not 0:02:08.280 --> 0:02:10.600 just a japan problem any Ilonka. 0:02:15.760 --> 0:02:19.320 This is the big Take Asia from Bloomberg News. I'm Wanha. 0:02:19.919 --> 0:02:22.360 Every week we take you inside some of the world's 0:02:22.360 --> 0:02:26.480 biggest and most powerful economies and the markets tycoons and 0:02:26.639 --> 0:02:31.079 businesses that drive this ever shifting region. Today, in the show, 0:02:31.280 --> 0:02:34.320 Japan and the US played tag team to rescue the 0:02:34.400 --> 0:02:38.240 yin what's at risk for American consumers if the plan 0:02:38.400 --> 0:02:41.720 doesn't work? And why a weekend is a problem for 0:02:41.800 --> 0:02:51.960 the global economy, not just for Japan Ruth. To understand 0:02:51.960 --> 0:02:55.200 what's happening this week, we actually need to flash back 0:02:55.240 --> 0:02:58.200 to Japan in the nineteen eighties. Can you paint a 0:02:58.240 --> 0:03:00.240 picture of Japan's economy. 0:03:00.520 --> 0:03:04.960 In a word booming? The Nika gained more than four 0:03:05.040 --> 0:03:09.320 hundred and fifty percent over a decade. It was explosive. 0:03:09.919 --> 0:03:15.040 Interest rates were still low, bangs were gangbusters in terms 0:03:15.080 --> 0:03:21.000 of landing aggressively. There was optimism about the Japanese economy, 0:03:21.560 --> 0:03:25.920 so that fueled a frenzy of buying stocks, property, and 0:03:25.960 --> 0:03:30.120 then suddenly it came crashing down. In nineteen eighty nine, 0:03:30.440 --> 0:03:32.680 the Bank of Japan raised interest rates in a big 0:03:32.720 --> 0:03:36.400 way over the coming month's rates when from two point 0:03:36.480 --> 0:03:39.800 five percent to six percent. It was a mental crazy 0:03:39.840 --> 0:03:48.440 increase and suddenly, almost overnight, borrowing became so much more expensive. 0:03:49.200 --> 0:03:52.480 Credit growth are the bags that were happily landing, just 0:03:53.080 --> 0:03:56.960 no stved. 0:03:56.280 --> 0:03:59.640 How did that long period of economic stagnation affect Japan's 0:03:59.680 --> 0:04:01.000 interest so. 0:04:01.080 --> 0:04:06.760 It went on for decades. One piece of action over 0:04:06.800 --> 0:04:10.880 the period of months a year ended up being decades 0:04:11.680 --> 0:04:16.200 of lost growth. The BOJA eventually cut rates to zero, 0:04:16.360 --> 0:04:19.039 tried to revive growth, and Japan became the pioneer in 0:04:19.200 --> 0:04:23.279 zero interest rates to try and bol study economy. But 0:04:23.360 --> 0:04:29.599 it wasn't until recently that we've seen Japan began to normalize. 0:04:28.520 --> 0:04:31.960 After decades of deflation. The Bank of Japan has come 0:04:32.040 --> 0:04:36.040 under pressure to cool inflation. In March twenty twenty four, 0:04:36.200 --> 0:04:40.279 the central Bank exited its zero rates policy, raising interest 0:04:40.360 --> 0:04:44.360 rates for the first time in seventeen years. Including that move, 0:04:44.480 --> 0:04:47.839 the BOJS raised interest rates five times in total. 0:04:50.080 --> 0:04:54.080 Where our Japan interest rates today about one percent okay 0:04:55.480 --> 0:04:59.400 US versus Japan. The interest rate gap at the moment 0:05:00.120 --> 0:05:04.599 is two hundred and seventy five basis points against Australia. 0:05:05.160 --> 0:05:10.520 It's three hundred and thirty five basis points with emerging 0:05:10.600 --> 0:05:13.839 markets within a nature for example, there's a four hundred 0:05:13.839 --> 0:05:17.200 and seventy five basis points difference with Brazil. It is 0:05:17.320 --> 0:05:19.600 over one thousand and three hundred. 0:05:20.000 --> 0:05:23.119 That's crazy, So Japan's interest rates are very, very low 0:05:23.200 --> 0:05:24.599 compared to the rest of the world. 0:05:24.839 --> 0:05:28.880 Correct as much as a journalist I write about japan 0:05:29.000 --> 0:05:31.919 racing interest rates, as a trader, you will look at 0:05:31.960 --> 0:05:36.400 it and go, ah, you know what that carry trade 0:05:36.600 --> 0:05:40.799 to buy something like US treasuries or that wind farm 0:05:40.920 --> 0:05:45.800 in Europe, or you know the costby Korean stocks. I'm 0:05:45.920 --> 0:05:48.919 better off putting my money where I'm going to get growth. 0:05:49.000 --> 0:05:51.640 And if I'm going to get a cheap funding currency 0:05:51.720 --> 0:05:56.440 to fuel that, that absolutely why not? And that currency 0:05:56.640 --> 0:05:57.080 is the yen? 0:05:58.720 --> 0:06:02.440 And how does that borrowing yen and investing overseas put 0:06:02.600 --> 0:06:04.120 pressure on the yen? 0:06:04.839 --> 0:06:09.120 So to answer that question, you need to understand the 0:06:09.279 --> 0:06:15.680 size of this carry trade investment. By some estimates, it's 0:06:15.760 --> 0:06:19.599 over four trillion US dollars, bigger than the size of 0:06:19.720 --> 0:06:25.760 India's economy. That is invested offshore. So investors are selling 0:06:25.760 --> 0:06:28.800 the yen trillions of dollars of it in order to 0:06:28.839 --> 0:06:31.200 fund investments offshore that are getting them more bang for 0:06:31.240 --> 0:06:33.919 their buck. What does that mean for the yen? It 0:06:34.000 --> 0:06:35.320 means continued pressure. 0:06:35.560 --> 0:06:38.640 So these low interest rates are really locking in that 0:06:38.720 --> 0:06:41.160 pressure for the Japanese yen. I wonder if you can 0:06:41.200 --> 0:06:45.039 tick through some of the other factors weighing on the yen. Okay. 0:06:45.120 --> 0:06:48.719 So if we take a macroeconomic look at Japan, it's 0:06:48.800 --> 0:06:52.279 not just the carry trade, which is obviously fueled by 0:06:52.279 --> 0:06:56.400 interesstrate differentials. Japan's national debt is over two hundred percent 0:06:56.400 --> 0:07:01.080 of its GDP, by far the highest amount develop economies. 0:07:01.760 --> 0:07:04.520 On top of that, you've got the ongoing Iran war. 0:07:04.560 --> 0:07:09.440 Remember Japan is a huge importer of energy from the 0:07:09.480 --> 0:07:15.720 Middle East, and if your input bill is higher because 0:07:15.720 --> 0:07:19.160 of the war, that only fuels inflation problems in Japan. 0:07:19.720 --> 0:07:22.200 And if the boj is seen behind a curve to 0:07:22.360 --> 0:07:26.120 raise interest rates to combat set inflation, the yen is 0:07:26.160 --> 0:07:31.600 another release or escapefol for investor angst, and one critical 0:07:31.640 --> 0:07:35.840 component to this story of a week n is also 0:07:35.960 --> 0:07:41.080 the impetus of local investors to investor offshore. You've got 0:07:41.080 --> 0:07:44.080 pension titans, life insurer titans that are some of the 0:07:44.120 --> 0:07:48.240 biggest investors in the world, and they have liabilities to match. 0:07:48.280 --> 0:07:51.440 They have to pay people that pensions. If inflation is 0:07:51.480 --> 0:07:55.200 eating into your returns, do you have an incentive to 0:07:55.560 --> 0:07:59.400 pull that massive amount of money offshore back home or 0:07:59.400 --> 0:08:03.160 do you hitch bets and continue investing offshore and take 0:08:03.240 --> 0:08:06.760 only some of that money back on shore. All this 0:08:07.480 --> 0:08:08.520 is not good for the yen. 0:08:08.800 --> 0:08:11.080 Now, there are pros and cons of a week end 0:08:11.160 --> 0:08:11.960 for Japan. 0:08:11.720 --> 0:08:16.160 Right, Absolutely, it becomes more desirable, isn't it to visit 0:08:16.600 --> 0:08:20.480 a destination like Tokyo or Kyoto. But that's equally lots 0:08:20.480 --> 0:08:23.280 of cons as well well. 0:08:23.360 --> 0:08:26.680 Yeah, and especially if you are a Japanese consumer, if 0:08:26.720 --> 0:08:29.000 you're living here in the country, you're feeling the pain 0:08:29.040 --> 0:08:30.040 of that week in right. 0:08:30.560 --> 0:08:38.680 Absolutely, import costs and househole expenses are soaring. Small businesses 0:08:38.760 --> 0:08:42.360 are getting squeezed as well, and that's why we've seen 0:08:42.400 --> 0:08:45.000 some of the policies that have come through, right from 0:08:45.280 --> 0:08:49.560 Prime Minister Sanayi Takaichi with tax initiatives to help with 0:08:49.600 --> 0:08:50.520 that cost of living. 0:08:50.880 --> 0:08:53.400 So that high cost of living has become a huge 0:08:53.400 --> 0:08:56.920 issue here in Japan. That's also contributed to really the 0:08:56.960 --> 0:08:59.040 downfall of the two previous prime ministers. 0:08:59.240 --> 0:09:04.960 Absolutely, right, voters will vote and if they are feeling 0:09:05.000 --> 0:09:10.320 the pain that's stemming from a week yen. Absolutely we 0:09:10.400 --> 0:09:14.520 have seen the downfall of Prime minister's leaders who have 0:09:14.720 --> 0:09:21.520 failed to address voters pain and concerns. 0:09:27.240 --> 0:09:29.880 This isn't the first time that the Japanese yen has 0:09:29.920 --> 0:09:33.560 needed support from its government. After the break, we'll find 0:09:33.600 --> 0:09:36.400 out why the US feels the need to get involved 0:09:36.520 --> 0:09:51.240 this time around. The Japanese yen has needed a lot 0:09:51.280 --> 0:09:55.319 of support recently. Bloomberg estimates that the Japanese government has 0:09:55.320 --> 0:09:59.400 been spending significant amounts to prop up the currency, almost 0:09:59.440 --> 0:10:02.640 seventy four billion dollars in April and more than eighty 0:10:02.679 --> 0:10:05.079 billion over two days at the end of last week. 0:10:05.960 --> 0:10:09.880 It's still unclear how much Washington has actually spent to 0:10:09.960 --> 0:10:13.120 help lift the yen from its four decade low. The 0:10:13.240 --> 0:10:16.880 joint intervention was likely larger than those undertaken in nineteen 0:10:16.920 --> 0:10:21.079 ninety eight and twenty eleven, when US contributions didn't surpass 0:10:21.200 --> 0:10:25.400 a billion dollars. Bloomberg's Ruth Carson says the huge US 0:10:25.480 --> 0:10:28.800 purchases show that a week yen isn't just a problem 0:10:28.880 --> 0:10:29.440 for Japan. 0:10:30.559 --> 0:10:34.520 So the currency market trades at nine point five trillion 0:10:34.600 --> 0:10:39.199 dollars a day a day, sorry, we're talking the biggest 0:10:39.200 --> 0:10:42.680 asset class in the world. The yen is the third 0:10:43.000 --> 0:10:47.920 most traded currency every single day in the world. That 0:10:48.120 --> 0:10:52.000 shows you the amount of capital that's slushing about when 0:10:52.000 --> 0:10:56.320 it comes to yen bets. So if something goes awry 0:10:57.120 --> 0:10:59.880 with a yen, for example, in this case it's ultra ultrau, 0:11:01.160 --> 0:11:05.120 its impact isn't felt just in Tokyo or on shore. 0:11:05.760 --> 0:11:10.520 It's a problem that can fester as far away as 0:11:10.679 --> 0:11:17.120 Jakarta through to you know, South Parlo. So a couple 0:11:17.120 --> 0:11:20.160 of key points to note. Japan, for example, is the 0:11:20.440 --> 0:11:26.040 largest foreign investor of US treasuries in the world. If 0:11:26.080 --> 0:11:31.720 they start selling to fund efforts to prop up the yen, 0:11:32.480 --> 0:11:35.199 it pushes down the price of US bonds, it pushes 0:11:35.280 --> 0:11:38.920 yeels higher, and that means higher borrowing costs for the US. 0:11:39.080 --> 0:11:43.600 Suddenly it's no longer just that homeowner in Tokyo that's 0:11:43.640 --> 0:11:46.680 feeling the pinch. If you have higher treasury yields in 0:11:46.720 --> 0:11:50.640 the US, say in the thirty year, that's impacting that 0:11:50.800 --> 0:11:52.440 New York mortgage holder. 0:11:53.120 --> 0:11:53.600 Right. 0:11:53.840 --> 0:11:56.079 And on top of that, we talked about the yen 0:11:56.360 --> 0:12:00.720 carry trade, and it's trillions of dollars around the world 0:12:00.720 --> 0:12:04.920 and it's cemented, right, So we saw that. We saw 0:12:04.960 --> 0:12:07.440 that happen in August twenty twenty four when the yen 0:12:07.720 --> 0:12:12.760 suddenly searched and wiped out profits of hedged funds, stock investors, 0:12:13.000 --> 0:12:17.840 credit investors were trembling. And it's impactful to the ploy 0:12:17.920 --> 0:12:21.079 where it can destabilize global markets. 0:12:21.600 --> 0:12:24.560 What does it mean for a government to intervene in 0:12:24.600 --> 0:12:28.080 the currency markets? How does that actually work in practice? 0:12:28.520 --> 0:12:32.320 In this case, the chain works like this. Japan sells 0:12:32.480 --> 0:12:36.199 dollars which could be backed by as it's like treasuries 0:12:36.360 --> 0:12:42.280 US Treasury bills to bolster the yen. So Japan's finance 0:12:42.360 --> 0:12:47.040 ministry decides to intervene. We're acting now. The boj the 0:12:47.040 --> 0:12:51.240 Bank of Japan, will act as its agent. Japan sells 0:12:51.360 --> 0:12:55.120 US dollars from its FX reserves. It uses the dollar 0:12:55.880 --> 0:12:59.600 to then buy the yen. To put this into context, 0:13:01.280 --> 0:13:05.000 Japan has more than one trillion dollars in effex reserves. 0:13:05.320 --> 0:13:09.760 That's a ton of firepower. Common Sachs in May after 0:13:09.920 --> 0:13:16.960 April's intervention, then said that Japan could intervene about thirty 0:13:17.000 --> 0:13:23.640 more times at its April intervention size and ruths. 0:13:24.040 --> 0:13:28.480 How effective were these interventions? What happened to the end 0:13:28.600 --> 0:13:30.720 after Japan's government intervened in April? 0:13:31.000 --> 0:13:34.600 Okay, so the yen, we can pass one sixty per dollar. 0:13:35.200 --> 0:13:39.000 Japan then conducted a yen buying operation on April thirtieth, 0:13:39.040 --> 0:13:42.840 according to people familiar with the matter, and dollar yen plunged. 0:13:43.600 --> 0:13:47.520 It went from around one sixty to one of fifty five, huge, 0:13:47.760 --> 0:13:52.680 huge moves and wiped off a lot of that bearish 0:13:52.800 --> 0:13:58.719 yen sentiment. Did it work in short, No, because they 0:13:58.760 --> 0:14:03.800 had to intervene a again. Recently, dollar yen continued to 0:14:04.000 --> 0:14:07.960 creep higher, and it comes down to that great differential 0:14:08.040 --> 0:14:12.240 story again. So investors came back and it just kept 0:14:12.280 --> 0:14:13.839 coming back to sell the en. 0:14:15.160 --> 0:14:19.720 What's your take, Ruth on what's different about this latest intervention? 0:14:21.520 --> 0:14:26.640 So the US involvement is historic. It's decades since we 0:14:26.680 --> 0:14:29.760 had seen anything coordinated like this. But the fact that 0:14:29.840 --> 0:14:34.040 you've got the US essentially coming in a way to 0:14:34.160 --> 0:14:38.720 Japan's rescue shows that this is not just a Japan 0:14:38.840 --> 0:14:43.880 problem any longer. That sends a strong signal. Whether or 0:14:43.920 --> 0:14:49.600 not markets heeded is something else altogether. But the fact 0:14:49.880 --> 0:14:53.200 that they have come out to work together is highly, 0:14:53.280 --> 0:14:54.440 highly significant. 0:14:54.840 --> 0:14:59.960 What's been the message on continued interventions? Is this the last? 0:15:00.880 --> 0:15:04.920 So if we listen to Donald Trump, who's obviously underlined 0:15:05.440 --> 0:15:09.200 that friendship with Japan, which kind of in a way 0:15:09.320 --> 0:15:13.000 sort of lends heft to further intervention efforts. At the 0:15:13.040 --> 0:15:15.840 same time, you've got the Finance Minister of Japan coming 0:15:15.880 --> 0:15:18.840 out to say that there will be there could be 0:15:19.760 --> 0:15:25.040 further coordinated intervention, so that definitely puts investors on hire 0:15:25.080 --> 0:15:28.080 it This may not be a one off, it is 0:15:28.360 --> 0:15:31.200 likely not going to be a one off when that 0:15:31.320 --> 0:15:34.360 rate differential story is still very much in play. 0:15:34.800 --> 0:15:38.520 And Ruth, what does a successful intervention look like for 0:15:38.560 --> 0:15:42.440 the markets? It's hard to answer that again because it 0:15:42.480 --> 0:15:48.040 hasn't worked. So successful intervention, one would say, is where 0:15:48.040 --> 0:15:52.880 the yen does not only strengthen but keep its strength. 0:15:53.400 --> 0:15:57.000 Where you will get investors in Japan and mega funds 0:15:57.040 --> 0:16:00.960 coming out to say we are buying Japanese assets mass ones, well, 0:16:01.000 --> 0:16:04.680 we are bullish on the yen, and that sends strong 0:16:04.760 --> 0:16:06.720 signals to the rest of the world that hey. 0:16:06.600 --> 0:16:10.920 You know what, it worked. We are now believing the 0:16:11.000 --> 0:16:14.160 story of a stronger yen. But I don't see firm 0:16:14.240 --> 0:16:16.120 evidence of that just yet. 0:16:17.640 --> 0:16:19.880 And what do you think needs to happen for Japan 0:16:20.000 --> 0:16:23.440 to wean itself off of the need for these interventions? 0:16:23.840 --> 0:16:29.080 Raise interest rates and raise it fast and high without 0:16:29.240 --> 0:16:33.640 destabilizing one of the world's biggest and most important economies. 0:16:34.360 --> 0:16:37.200 When I speak to investors, when I speak to traders, 0:16:37.600 --> 0:16:41.600 the number one reason they cite as to why they're 0:16:41.640 --> 0:16:47.360 selling the yen is because of Japan's wide interest rate 0:16:47.440 --> 0:16:50.960 gaps with the US and the rest of the world. Now, remember, 0:16:51.080 --> 0:16:53.720 we can debate about a Bank of Japan policy and 0:16:53.760 --> 0:16:57.440 how careful they are, and they have to be without 0:16:57.480 --> 0:17:02.000 destabilizing their own economy and balancing a week yin so 0:17:02.160 --> 0:17:04.399 they have their reasons to act the way they do. 0:17:05.359 --> 0:17:09.160 But while the japan interest rate gap with the US 0:17:09.280 --> 0:17:12.159 is so large, investors will still return to it. 0:17:12.240 --> 0:17:12.520 Anko. 0:17:12.640 --> 0:17:15.639 That's a juicy trade right there, to keep selling the en. 0:17:22.960 --> 0:17:27.080 This is The Big Take Asia from Bloomberg News. I'm wanha. 0:17:27.160 --> 0:17:29.880 To get more from The Big Take and unlimited access 0:17:29.920 --> 0:17:33.040 to all of Bloomberg dot Com, subscribe today at Bloomberg 0:17:33.080 --> 0:17:36.720 dot com slash podcast offer. If you like this episode, 0:17:36.800 --> 0:17:39.040 make sure to follow and review The Big Take Asia 0:17:39.119 --> 0:17:42.120 wherever you listen to podcasts. It really helps people find 0:17:42.160 --> 0:17:44.440 the show. Thanks for listening, See you next time.