WEBVTT - Here's Why a Weak Yen Isn't Just Japan's Problem 0:00:02.480 --> 0:00:10.039 Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carroll and 0:00:10.080 --> 0:00:12.399 this is Here's Why, where we take one news story 0:00:12.440 --> 0:00:14.600 and explain it in just a few minutes with our 0:00:14.640 --> 0:00:16.000 experts here at Bloomberg. 0:00:20.560 --> 0:00:24.360 The first joint intervention in fifteen years to live the 0:00:24.440 --> 0:00:26.880 Japanese currency from a year four decade low. 0:00:27.000 --> 0:00:29.600 They have a weekending in and they wanted a little 0:00:29.640 --> 0:00:31.680 bit of help, and we're always there for Japan. Ja 0:00:31.720 --> 0:00:35.760 Benjmin very good do it. To quote Lord Palmerston, you 0:00:35.800 --> 0:00:38.320 know countries have interest andal allies. I mean, I know 0:00:38.440 --> 0:00:40.680 Japan's a bit of an ally, but basically it's in 0:00:40.720 --> 0:00:41.440 their interests. 0:00:41.560 --> 0:00:44.360 There's a fundamental change that's taking place in Japan in 0:00:44.440 --> 0:00:48.760 terms of inflation now existing. We finished with the multi 0:00:48.800 --> 0:00:52.000 decade era of mild deflation in Japan. 0:00:53.760 --> 0:00:57.720 It was a landmark intervention in currency markets, Japan and 0:00:57.840 --> 0:01:01.240 the United States working together to prop up the value 0:01:01.280 --> 0:01:04.120 of the yen for the first time in over a decade, 0:01:04.760 --> 0:01:07.960 and it worked, at least initially. The end strengthened as 0:01:08.040 --> 0:01:10.600 much as five percent from where it had been trading, 0:01:10.840 --> 0:01:13.240 which was close to the weakest level against the dollar 0:01:13.400 --> 0:01:16.880 in forty years, and there could be more to come. 0:01:17.360 --> 0:01:24.280 Here's why a week yen isn't just Japan's problem. Our 0:01:24.319 --> 0:01:27.120 executive editor for Asian Markets, Paul Dobson, joined us now 0:01:27.480 --> 0:01:29.800 for more. Paul, first of all, can you just explain 0:01:29.840 --> 0:01:32.039 to us why has the end been so weak and 0:01:32.080 --> 0:01:33.880 what does that meant for Japan's economy. 0:01:34.080 --> 0:01:38.280 Hi, there's Stephen. So the yen has been on more 0:01:38.400 --> 0:01:42.560 or less a continual downtrend for several years. It's under 0:01:42.600 --> 0:01:46.080 pressure for some long standing reasons and some relatively more 0:01:46.120 --> 0:01:50.640 recent reasons. I think primarily, interest rates in Japan are 0:01:50.840 --> 0:01:52.560 lower than the rest of the world, and even though 0:01:52.600 --> 0:01:55.960 the boj has started to raise interest rates, you can 0:01:56.000 --> 0:02:00.120 get more bang for your buck in many other jurisdictions 0:02:00.120 --> 0:02:02.640 it were. So there's what we call in the market 0:02:02.680 --> 0:02:05.800 the carry trade, where people borrow Japanese yet and essentially 0:02:06.240 --> 0:02:08.560 put it into other assets all around the rest of 0:02:08.600 --> 0:02:11.240 the world that earn a higher yield, and so that 0:02:11.360 --> 0:02:16.160 has one currency weakening effect. Those interest rate differentials are 0:02:16.160 --> 0:02:20.000 really important for currency valuation in general. On top of that, though, 0:02:20.160 --> 0:02:24.440 you've got a certain degree of mistrust in the Japanese 0:02:24.480 --> 0:02:27.760 government and the Japanese economic policies because Japan is sitting 0:02:27.760 --> 0:02:31.880 on such a large debt pile. The market worries about 0:02:31.960 --> 0:02:34.480 how much the government is going to spend, and each 0:02:34.480 --> 0:02:37.040 time it signals that it's going to you know, ease 0:02:37.120 --> 0:02:39.520 taxes or anything like that, they have that sort of 0:02:39.680 --> 0:02:42.800 distrust dynamic, which is adding a risk premium to the end, 0:02:42.840 --> 0:02:44.640 a little bit like you have with the British pound. 0:02:45.200 --> 0:02:48.000 And on top of that, there's the cost of oil, 0:02:48.080 --> 0:02:51.200 which is important for Japan because it's a net energy importer, 0:02:51.720 --> 0:02:54.359 and during the recent conflict in the Middle East, that's 0:02:54.360 --> 0:02:57.120 pushed up those costs a lot for Japan, which has 0:02:57.160 --> 0:03:00.519 had a negative impact on the growth outlook and therefore 0:03:00.600 --> 0:03:01.840 also weighed on the currency. 0:03:02.639 --> 0:03:04.800 So all of that's led us to a situation where 0:03:04.840 --> 0:03:09.680 we saw this intervention jointly by Japan and the United States. 0:03:09.800 --> 0:03:13.480 Why did the US get involved, because it's highly unusual 0:03:13.560 --> 0:03:14.079 that they have. 0:03:15.120 --> 0:03:17.720 Yeah, So there's several different reasons that the US has 0:03:17.840 --> 0:03:21.440 offered for this, and some that it hasn't said so explicitly. 0:03:21.800 --> 0:03:22.000 You know. 0:03:22.040 --> 0:03:25.160 First and foremost, both Donald Trump and Treasury Secretary Bessent 0:03:25.520 --> 0:03:28.200 have talked about this idea of friendship. And it is 0:03:28.200 --> 0:03:31.120 true that you can use your currency as one way 0:03:31.200 --> 0:03:34.480 of building trust and relationship with your allies. The US 0:03:34.880 --> 0:03:38.360 has military ties with Japan, and it wants to firm 0:03:38.440 --> 0:03:41.240 up those relationships. We saw something similar in a way 0:03:41.280 --> 0:03:45.760 with its support for Argentina as well using currencies, So 0:03:45.840 --> 0:03:48.640 there is that kind of sense that they genuinely want 0:03:48.680 --> 0:03:52.400 to help out under Japan itself didn't want the currency 0:03:52.440 --> 0:03:56.040 to weaken any further because it was starting to cause 0:03:56.040 --> 0:03:59.400 some sort of financial and economic risks there. I think 0:03:59.600 --> 0:04:02.600 there's also on top of that a sense of wanting 0:04:02.640 --> 0:04:05.480 something in return from the US. So it has this 0:04:05.520 --> 0:04:09.040 trade deal with Japan where Japanese over time is supposed 0:04:09.040 --> 0:04:11.640 to be investing large amounts of money in the US economy. 0:04:12.040 --> 0:04:13.880 It's much easier for them to do that from a 0:04:13.920 --> 0:04:16.719 position of strong yen than it is from a week 0:04:16.760 --> 0:04:19.359 again or a prospect of a continually weakening yen, so 0:04:19.440 --> 0:04:23.080 that stability helps. I think there's also maybe some element 0:04:23.120 --> 0:04:26.680 of self defense from the US, because if Japan wanted 0:04:26.720 --> 0:04:30.680 to unilaterally act in currency markets to stem the yen losses, 0:04:30.720 --> 0:04:33.040 then what it might do is sell some of its 0:04:33.080 --> 0:04:35.400 holdings of US government bonds. And that matters because it 0:04:35.440 --> 0:04:37.560 holds an awful lot of US government bonds. So if 0:04:37.560 --> 0:04:40.719 it were to liquidate those assets in order to sell 0:04:40.839 --> 0:04:43.120 the US dollar get US dollars it can sell to 0:04:43.240 --> 0:04:46.080 buy Japanese yen, that would have a damaging impact on 0:04:46.120 --> 0:04:48.400 the US treasury market at a time when yields are 0:04:48.440 --> 0:04:51.600 already at the tops of recent long term ranges. So 0:04:51.839 --> 0:04:55.120 that would be more troublesome development for the US and 0:04:55.160 --> 0:04:58.479 therefore sort of helping out in this way defends the 0:04:58.640 --> 0:05:01.880 US treasury market. If you listen to Scott Bessent, he 0:05:01.920 --> 0:05:04.480 has a fourth kind of reason, which is I think 0:05:04.520 --> 0:05:06.080 you know, and this is where he's wearing his hedge 0:05:06.080 --> 0:05:09.359 fund manager's hat opportunity because they do genuinely think that 0:05:09.400 --> 0:05:13.360 the yen is undervalued at these levels. So what they've 0:05:13.400 --> 0:05:15.520 done essentially has shifted some of their money out of 0:05:15.560 --> 0:05:20.200 euros and into Japanese yen based on the hope, the prospect, 0:05:20.279 --> 0:05:24.120 the confidence that over time those holdings will gain in 0:05:24.200 --> 0:05:26.760 value as well as the Japanese economy sort of turns 0:05:26.760 --> 0:05:28.160 the corner and really starts to grow. 0:05:28.720 --> 0:05:32.000 Okay, So a number of reasons why the US has 0:05:32.080 --> 0:05:34.880 done this On the question of the risk of Japan 0:05:35.000 --> 0:05:38.520 selling US treasuries, though, does this intervention remove that risk 0:05:38.640 --> 0:05:39.760 or is it still present. 0:05:40.240 --> 0:05:43.680 Doesn't remove it entirely, but it has helped the US 0:05:43.720 --> 0:05:47.200 in a couple of ways. One, both Bessent and Japan's 0:05:47.240 --> 0:05:51.000 Finance Minister Kasiyama have drawn attention to this facility the 0:05:51.480 --> 0:05:54.600 Federal Reserve offers where it's possible to use treasuries as 0:05:54.640 --> 0:05:58.160 collateral against dotor loans in order to get your hands 0:05:58.160 --> 0:06:01.479 on dollars that you could use to intervene in the 0:06:01.520 --> 0:06:05.400 currency markets, as we were discussing. So that's one way 0:06:05.440 --> 0:06:08.960 that they're looking to ease the risk of Japan selling treasuries. 0:06:09.320 --> 0:06:13.320 You know, it depends whether they can genuinely stabilize the 0:06:13.400 --> 0:06:15.919 yen at these levels or whether it will continue to weaken, 0:06:15.960 --> 0:06:18.480 and there will need to be further efforts from Japan 0:06:18.600 --> 0:06:20.800 over time. What we've seen in the market, although as 0:06:20.800 --> 0:06:24.919 you said, the initial response was pretty strong, the follow 0:06:24.960 --> 0:06:27.320 through hasn't been that dramatic. The en has started to 0:06:27.400 --> 0:06:30.400 dribble a little bit lower again. So the real test 0:06:30.440 --> 0:06:32.800 will be whether we can stabilize at these slightly stronger 0:06:32.880 --> 0:06:35.800 levels or whether we do start that drift weaker again, 0:06:35.839 --> 0:06:38.880 which would put more pressure on the Japanese government to 0:06:38.960 --> 0:06:41.800 act some more and would therefore, you know, put those 0:06:41.800 --> 0:06:42.960 treasuries at risk again. 0:06:43.400 --> 0:06:46.799 So what's likely to trigger the potential for more intervention 0:06:46.880 --> 0:06:48.280 if that were to be neededs. 0:06:49.080 --> 0:06:52.760 So outright levels seem to be one thing the government 0:06:53.000 --> 0:06:56.599 is wary of. Definitely one sided bets is another. So 0:06:56.680 --> 0:06:59.520 if it seems like most of the market wants to 0:06:59.560 --> 0:07:01.720 sell the U, that would be something that they would 0:07:01.720 --> 0:07:04.480 probably want to step into a little bit more urgently 0:07:04.520 --> 0:07:07.040 and radically. The pace of change is something that they 0:07:07.080 --> 0:07:11.160 often talk about as being another watchword, although in recent 0:07:11.240 --> 0:07:14.360 times the weakness in the end was very slow and gradual. 0:07:14.400 --> 0:07:17.280 It wasn't a kind of chaotic seller or anything like that, 0:07:17.520 --> 0:07:21.400 so maybe that doesn't count so much as how weak 0:07:21.800 --> 0:07:25.120 it is relative to sort of long term averages, how 0:07:25.120 --> 0:07:28.440 weak it is on an outright basis as well. It's 0:07:28.520 --> 0:07:31.920 not entirely harmful for Japan to have a week a yen. 0:07:32.080 --> 0:07:34.800 It does help in terms of its exports to the 0:07:34.840 --> 0:07:37.600 rest of the world, so from technology for cars and 0:07:37.680 --> 0:07:41.000 those kinds of things, but the benefits from a week 0:07:41.040 --> 0:07:44.000 agen at these levels are less obvious, and in fact, 0:07:44.040 --> 0:07:47.000 you know, there were also the costs related to buying 0:07:47.040 --> 0:07:49.600 more imports sort of more harmful. So I think that 0:07:49.680 --> 0:07:52.320 they will want to make it a little bit more 0:07:52.320 --> 0:07:54.440 clear that there's a redline here and that they won't 0:07:54.480 --> 0:07:57.840 tolerate a rapid move back to the levels above one 0:07:57.960 --> 0:08:00.680 sixty that we saw over the last f weeks. 0:08:01.000 --> 0:08:03.080 We've talked a lot about the US involvement in this, 0:08:03.200 --> 0:08:06.480 what other economies are affected by these kinds of moves 0:08:06.520 --> 0:08:07.160 in the end. 0:08:08.280 --> 0:08:11.400 Sort of immediately, it was interesting to note that South 0:08:11.480 --> 0:08:13.760 Korea appears to have had some sort of a role 0:08:14.120 --> 0:08:16.720 in what we saw in the interventions as well. So 0:08:16.760 --> 0:08:20.040 the one actually had been weakening in tandem with the 0:08:20.120 --> 0:08:23.040 Japanese yen for a lot of this year, but rebounded 0:08:23.240 --> 0:08:26.280 at the start of last month and was already strengthening. 0:08:26.360 --> 0:08:29.520 So it got a little bit turbocharged by those moves, 0:08:29.880 --> 0:08:32.760 and so we've got a stronger one. So the Korean economy, 0:08:33.120 --> 0:08:35.120 the chip ex borders won't benefit so much from a 0:08:35.160 --> 0:08:38.120 week again, but it will probably stabilize the economic outlook 0:08:38.120 --> 0:08:40.679 for South Korea a little bit more. It was interesting 0:08:40.760 --> 0:08:44.560 the US was selling euros to buy those yen, but 0:08:44.600 --> 0:08:46.480 it doesn't seem to have caused a great deal of 0:08:46.520 --> 0:08:48.840 stir there hasn't been too much pushed back from Europe 0:08:49.120 --> 0:08:52.640 on that, so really, you know, the US and Japan 0:08:52.679 --> 0:08:55.240 are the two most important things to think about. I 0:08:55.280 --> 0:08:57.480 think the other thing that you know, when Scott Besson 0:08:57.640 --> 0:09:02.520 was talking to CNBC was drawing attention to as well 0:09:02.640 --> 0:09:05.120 was the risk that if the yen did continue to 0:09:05.240 --> 0:09:08.360 weaken and when a long way further than that could 0:09:08.440 --> 0:09:12.840 raise the risk of competitive devaluation. So other countries, including 0:09:12.880 --> 0:09:16.480 maybe China and South Korea deliberately allowing their currencies to 0:09:16.520 --> 0:09:19.520 weaken as well to remain competitive with Japan. So that 0:09:19.520 --> 0:09:21.520 would be a big pitch of long term thing rather 0:09:21.559 --> 0:09:23.599 than an immediate concern, But it was there in the 0:09:23.640 --> 0:09:24.440 background as well. 0:09:24.760 --> 0:09:27.559 Okay, we'll plenty to keep us with our eyes closely 0:09:27.600 --> 0:09:29.560 focused on the yen and its movements in the future. 0:09:29.600 --> 0:09:32.200 Paul Dobbs and our executive editor for Asia Markets, thank 0:09:32.200 --> 0:09:35.560 you very much. For more explanations like this from our 0:09:35.600 --> 0:09:38.480 team of three thousand journalists and analysts around the world, 0:09:38.559 --> 0:09:43.600 go to Bloomberg dot com slash explainers. I'm Stephen Carroll. 0:09:43.720 --> 0:09:46.160 This is here's why. I'll be back next week with more. 0:09:46.480 --> 0:09:47.319 Thanks for listening.