Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carroll and
Speaker 1: this is Here's Why, where we take one news story
Speaker 1: and explain it in just a few minutes with our
Speaker 1: experts here at Bloomberg.
Speaker 2: The first joint intervention in fifteen years to live the
Speaker 2: Japanese currency from a year four decade low.
Speaker 3: They have a weekending in and they wanted a little
Speaker 3: bit of help, and we're always there for Japan. Ja
Speaker 3: Benjmin very good do it. To quote Lord Palmerston, you
Speaker 3: know countries have interest andal allies. I mean, I know
Speaker 3: Japan's a bit of an ally, but basically it's in
Speaker 3: their interests.
Speaker 2: There's a fundamental change that's taking place in Japan in
Speaker 2: terms of inflation now existing. We finished with the multi
Speaker 2: decade era of mild deflation in Japan.
Speaker 1: It was a landmark intervention in currency markets, Japan and
Speaker 1: the United States working together to prop up the value
Speaker 1: of the yen for the first time in over a decade,
Speaker 1: and it worked, at least initially. The end strengthened as
Speaker 1: much as five percent from where it had been trading,
Speaker 1: which was close to the weakest level against the dollar
Speaker 1: in forty years, and there could be more to come.
Speaker 1: Here's why a week yen isn't just Japan's problem. Our
Speaker 1: executive editor for Asian Markets, Paul Dobson, joined us now
Speaker 1: for more. Paul, first of all, can you just explain
Speaker 1: to us why has the end been so weak and
Speaker 1: what does that meant for Japan's economy.
Speaker 3: Hi, there's Stephen. So the yen has been on more
Speaker 3: or less a continual downtrend for several years. It's under
Speaker 3: pressure for some long standing reasons and some relatively more
Speaker 3: recent reasons. I think primarily, interest rates in Japan are
Speaker 3: lower than the rest of the world, and even though
Speaker 3: the boj has started to raise interest rates, you can
Speaker 3: get more bang for your buck in many other jurisdictions
Speaker 3: it were. So there's what we call in the market
Speaker 3: the carry trade, where people borrow Japanese yet and essentially
Speaker 3: put it into other assets all around the rest of
Speaker 3: the world that earn a higher yield, and so that
Speaker 3: has one currency weakening effect. Those interest rate differentials are
Speaker 3: really important for currency valuation in general. On top of that, though,
Speaker 3: you've got a certain degree of mistrust in the Japanese
Speaker 3: government and the Japanese economic policies because Japan is sitting
Speaker 3: on such a large debt pile. The market worries about
Speaker 3: how much the government is going to spend, and each
Speaker 3: time it signals that it's going to you know, ease
Speaker 3: taxes or anything like that, they have that sort of
Speaker 3: distrust dynamic, which is adding a risk premium to the end,
Speaker 3: a little bit like you have with the British pound.
Speaker 3: And on top of that, there's the cost of oil,
Speaker 3: which is important for Japan because it's a net energy importer,
Speaker 3: and during the recent conflict in the Middle East, that's
Speaker 3: pushed up those costs a lot for Japan, which has
Speaker 3: had a negative impact on the growth outlook and therefore
Speaker 3: also weighed on the currency.
Speaker 1: So all of that's led us to a situation where
Speaker 1: we saw this intervention jointly by Japan and the United States.
Speaker 1: Why did the US get involved, because it's highly unusual
Speaker 1: that they have.
Speaker 3: Yeah, So there's several different reasons that the US has
Speaker 3: offered for this, and some that it hasn't said so explicitly.
Speaker 2: You know.
Speaker 3: First and foremost, both Donald Trump and Treasury Secretary Bessent
Speaker 3: have talked about this idea of friendship. And it is
Speaker 3: true that you can use your currency as one way
Speaker 3: of building trust and relationship with your allies. The US
Speaker 3: has military ties with Japan, and it wants to firm
Speaker 3: up those relationships. We saw something similar in a way
Speaker 3: with its support for Argentina as well using currencies, So
Speaker 3: there is that kind of sense that they genuinely want
Speaker 3: to help out under Japan itself didn't want the currency
Speaker 3: to weaken any further because it was starting to cause
Speaker 3: some sort of financial and economic risks there. I think
Speaker 3: there's also on top of that a sense of wanting
Speaker 3: something in return from the US. So it has this
Speaker 3: trade deal with Japan where Japanese over time is supposed
Speaker 3: to be investing large amounts of money in the US economy.
Speaker 3: It's much easier for them to do that from a
Speaker 3: position of strong yen than it is from a week
Speaker 3: again or a prospect of a continually weakening yen, so
Speaker 3: that stability helps. I think there's also maybe some element
Speaker 3: of self defense from the US, because if Japan wanted
Speaker 3: to unilaterally act in currency markets to stem the yen losses,
Speaker 3: then what it might do is sell some of its
Speaker 3: holdings of US government bonds. And that matters because it
Speaker 3: holds an awful lot of US government bonds. So if
Speaker 3: it were to liquidate those assets in order to sell
Speaker 3: the US dollar get US dollars it can sell to
Speaker 3: buy Japanese yen, that would have a damaging impact on
Speaker 3: the US treasury market at a time when yields are
Speaker 3: already at the tops of recent long term ranges. So
Speaker 3: that would be more troublesome development for the US and
Speaker 3: therefore sort of helping out in this way defends the
Speaker 3: US treasury market. If you listen to Scott Bessent, he
Speaker 3: has a fourth kind of reason, which is I think
Speaker 3: you know, and this is where he's wearing his hedge
Speaker 3: fund manager's hat opportunity because they do genuinely think that
Speaker 3: the yen is undervalued at these levels. So what they've
Speaker 3: done essentially has shifted some of their money out of
Speaker 3: euros and into Japanese yen based on the hope, the prospect,
Speaker 3: the confidence that over time those holdings will gain in
Speaker 3: value as well as the Japanese economy sort of turns
Speaker 3: the corner and really starts to grow.
Speaker 1: Okay, So a number of reasons why the US has
Speaker 1: done this On the question of the risk of Japan
Speaker 1: selling US treasuries, though, does this intervention remove that risk
Speaker 1: or is it still present.
Speaker 3: Doesn't remove it entirely, but it has helped the US
Speaker 3: in a couple of ways. One, both Bessent and Japan's
Speaker 3: Finance Minister Kasiyama have drawn attention to this facility the
Speaker 3: Federal Reserve offers where it's possible to use treasuries as
Speaker 3: collateral against dotor loans in order to get your hands
Speaker 3: on dollars that you could use to intervene in the
Speaker 3: currency markets, as we were discussing. So that's one way
Speaker 3: that they're looking to ease the risk of Japan selling treasuries.
Speaker 3: You know, it depends whether they can genuinely stabilize the
Speaker 3: yen at these levels or whether it will continue to weaken,
Speaker 3: and there will need to be further efforts from Japan
Speaker 3: over time. What we've seen in the market, although as
Speaker 3: you said, the initial response was pretty strong, the follow
Speaker 3: through hasn't been that dramatic. The en has started to
Speaker 3: dribble a little bit lower again. So the real test
Speaker 3: will be whether we can stabilize at these slightly stronger
Speaker 3: levels or whether we do start that drift weaker again,
Speaker 3: which would put more pressure on the Japanese government to
Speaker 3: act some more and would therefore, you know, put those
Speaker 3: treasuries at risk again.
Speaker 1: So what's likely to trigger the potential for more intervention
Speaker 1: if that were to be neededs.
Speaker 3: So outright levels seem to be one thing the government
Speaker 3: is wary of. Definitely one sided bets is another. So
Speaker 3: if it seems like most of the market wants to
Speaker 3: sell the U, that would be something that they would
Speaker 3: probably want to step into a little bit more urgently
Speaker 3: and radically. The pace of change is something that they
Speaker 3: often talk about as being another watchword, although in recent
Speaker 3: times the weakness in the end was very slow and gradual.
Speaker 3: It wasn't a kind of chaotic seller or anything like that,
Speaker 3: so maybe that doesn't count so much as how weak
Speaker 3: it is relative to sort of long term averages, how
Speaker 3: weak it is on an outright basis as well. It's
Speaker 3: not entirely harmful for Japan to have a week a yen.
Speaker 3: It does help in terms of its exports to the
Speaker 3: rest of the world, so from technology for cars and
Speaker 3: those kinds of things, but the benefits from a week
Speaker 3: agen at these levels are less obvious, and in fact,
Speaker 3: you know, there were also the costs related to buying
Speaker 3: more imports sort of more harmful. So I think that
Speaker 3: they will want to make it a little bit more
Speaker 3: clear that there's a redline here and that they won't
Speaker 3: tolerate a rapid move back to the levels above one
Speaker 3: sixty that we saw over the last f weeks.
Speaker 1: We've talked a lot about the US involvement in this,
Speaker 1: what other economies are affected by these kinds of moves
Speaker 1: in the end.
Speaker 3: Sort of immediately, it was interesting to note that South
Speaker 3: Korea appears to have had some sort of a role
Speaker 3: in what we saw in the interventions as well. So
Speaker 3: the one actually had been weakening in tandem with the
Speaker 3: Japanese yen for a lot of this year, but rebounded
Speaker 3: at the start of last month and was already strengthening.
Speaker 3: So it got a little bit turbocharged by those moves,
Speaker 3: and so we've got a stronger one. So the Korean economy,
Speaker 3: the chip ex borders won't benefit so much from a
Speaker 3: week again, but it will probably stabilize the economic outlook
Speaker 3: for South Korea a little bit more. It was interesting
Speaker 3: the US was selling euros to buy those yen, but
Speaker 3: it doesn't seem to have caused a great deal of
Speaker 3: stir there hasn't been too much pushed back from Europe
Speaker 3: on that, so really, you know, the US and Japan
Speaker 3: are the two most important things to think about. I
Speaker 3: think the other thing that you know, when Scott Besson
Speaker 3: was talking to CNBC was drawing attention to as well
Speaker 3: was the risk that if the yen did continue to
Speaker 3: weaken and when a long way further than that could
Speaker 3: raise the risk of competitive devaluation. So other countries, including
Speaker 3: maybe China and South Korea deliberately allowing their currencies to
Speaker 3: weaken as well to remain competitive with Japan. So that
Speaker 3: would be a big pitch of long term thing rather
Speaker 3: than an immediate concern, But it was there in the
Speaker 3: background as well.
Speaker 1: Okay, we'll plenty to keep us with our eyes closely
Speaker 1: focused on the yen and its movements in the future.
Speaker 1: Paul Dobbs and our executive editor for Asia Markets, thank
Speaker 1: you very much. For more explanations like this from our
Speaker 1: team of three thousand journalists and analysts around the world,
Speaker 1: go to Bloomberg dot com slash explainers. I'm Stephen Carroll.
Speaker 1: This is here's why. I'll be back next week with more.
Speaker 1: Thanks for listening.