The yen exchange rate fell below the 160 mark, hitting a new multi-year low. Market rumors that the Japanese government may sell its U.S. Treasury bonds to ease the pressure on the yen to depreciate.
As soon as this news came out, it immediately triggered a strong reaction from the US side.
U.S. Treasury Secretary Janet Yellen said at a press conference that the U.S. will never allow Japan to sell U.S. bonds, calling it "across the Rubicon."
This metaphor from ancient Rome vividly expresses the determination of the United States:
Just as the crossing of the Rubicon by Caesar's army meant rebelling against the Roman Senate and going to war with it; Japan's sell-off of U.S. bonds will also mean a "declaration of war" between Japan and the United States in the financial sector.
What is the secret behind this farce?
1. The historical origin of Japan's large holdings of U.S. Treasury bonds
Why is Japan the second largest holder of U.S. Treasury bonds? This question begins with the take-off of Japan's economy after World War II.
After the end of World War II, Japan's economy began to run at high speed like a lion that woke up. Between 1946 and 1976, Japan's GDP grew at an average annual rate of 8.2%, which economists call a "period of high economic growth."
In the past 30 years, Japan's total GDP has increased by 70 times, and per capita GDP has increased by 50 times. By the 1970s, Japan had become the world's second-largest economy.
As the economy continues to grow, so does Japan's trade surplus.
According to the IMF, Japan's current account surplus was $85.9 billion, $87 billion, and $79 billion in 1986 and 1988 alone, respectively.
It is conceivable that Japan's huge trade surplus has caused Japan's foreign exchange reserves to overflow like a spring tide. So, what to do with this rapidly accumulating foreign exchange? Buying U.S. Treasury bonds has become the only choice for Japan.
Buying U.S. bonds has two major benefits for Japan: one is to preserve its value, and the other is to increase its value.
The U.S. dollar is a globally recognized hard currency and the first choice for foreign exchange reserves in all countries. Converting earned dollars into U.S. bonds is equivalent to depositing money in a safe deposit box with high security.
This "safe" is not only foolproof, but also brings stable returns. In 2022, the yield on the 10-year Treasury note briefly topped 4%.
In contrast, Japan's 10-year government bond yield has hovered below 0.5% for an extended period of time. Buying U.S. bonds in yen is like finding a secret path to a "high-yield country".
More importantly, the purchase of U.S. bonds contributes to a virtuous cycle in the Japanese economy. Japan's trade surplus with the United States is equivalent to transferring funds from the United States to Japan.
And when Japan uses its surplus to buy U.S. bonds, it is tantamount to "returning" the funds to the United States.
With this money, the United States can buy more Japanese goods, and Japan's surplus is getting bigger and bigger, and the more dollars it has in its hands.
This process is like a perpetual motion machine, driving the escalation of trade and capital exchanges between Japan and the United States.
Over time, Japan became a "big fan" of U.S. Treasury bonds.
According to the U.S. Treasury Department, Japan's holdings of U.S. Treasury bonds reached $1.21 trillion as of December 2023, second only to China's $1.62 trillion.
Over the past decade, Japan's holdings of U.S. debt have increased by an average of $170 billion per year.
Some economists jokingly say that Japan is not only a "super buyer" of American goods, but also a "super ATM" of the US government.
When the yen recently fell below the 160 mark against the dollar, the "ATM" suddenly went on strike.
Market rumors that in order to boost the local currency exchange rate, the Bank of Japan may sell its US Treasury bonds. This news really made the US government "lie down".
After all, if Japan does sell US bonds, it will inevitably trigger a sharp rise in US bond yields and increase the cost of US borrowing.
At the same time, the halo of safe-haven assets will fade as Treasury bonds that have lost their loyal buyers. This is undoubtedly a heavy blow to the $31 trillion U.S. bond market.
Behind the anxiety of the United States is the fear of the hegemony of the dollar. The dollar's status as a global reserve currency is largely due to the strong attractiveness of the U.S. bond market.
The cornerstone of the attractiveness of U.S. bonds is the confidence of overseas investors.
Japan, as the second largest country in terms of debt holdings, is likely to pull out of the U.S. bond market first, which is likely to trigger a chain reaction that will allow more countries to follow suit. At that time, the international influence of the dollar will be greatly reduced.
2. The impact of the depreciation of the yen on the Japanese economy
The yen exchange rate fell endlessly, like a punctured balloon, plummeting to the 160 mark.
For the Japanese economy, is there a pros or cons to such a "plunge" in the exchange rate? The answer to this question is intriguing.
From a trade perspective, the depreciation of the yen seems to have more benefits than disadvantages. The decline in the prices of export products has undoubtedly greatly increased the competitiveness of Japanese goods in overseas markets.
Taking Japanese cars as an example, Toyota's sales in the U.S. in 2023 increased by 12% year-on-year, Honda increased by 8%, and Nissan increased by 5%.
The sales of the three major automakers in the United States hit a new high in the past five years. Behind this, the depreciation of the yen has played a major role.
Taking Nissan Sylphy as an example, its price in the United States has dropped by nearly $1,000 compared with the previous year due to the impact of exchange rates. The price advantage has attracted a large number of American consumers.
Exports are booming, manufacturing is benefiting, and the Japanese government should be happy. However, there is another set of data that has policymakers frowning.
In 2023, Japan's trade deficit reached a record high of $40 billion. What's the problem? It turns out that the Japanese economy is extremely dependent on imports for energy, another "lifeline".
According to the data, Japan's dependence on foreign oil in 2023 will be 99.7%, and that of liquefied natural gas will be 97%. Japan's fossil fuel imports accounted for 6% of GDP that year, twice as much as Germany and four times as much as the United States.
If the yen depreciates sharply, the high price of energy imports will become a heavy burden on the Japanese economy.
If there are positive and negative impacts on the trade sector, the inflationary shock is a source of trouble for Japan.
In May 2024, Japan's core CPI rose 4.2% year-on-year, the highest since 1981.
Coincidentally, the Nikkei 225 index closed down 2.1% in January, the biggest monthly decline in nearly seven years. The stock market and prices are like two-wheeled chariots, taking turns to crush the pockets of the Japanese people. Seeing that the cost of living is rising, but the increase in wages is far from keeping up with prices, many Japanese people can't help but lament: "This day is a little unbearable!" "
What is even more worrying is that the Japanese economy is sliding into the quagmire of "stagflation". The so-called "stagflation" is when economic growth is sluggish, but inflation remains high.
When stagflation knocks on the door, the dilemma between central banks and governments is on the table:
Either interest rate hikes will curb inflation, but this will further dampen an already weak economy; Either let inflation go and let the people's pockets continue to "slim down".
Japanese Prime Minister Fumio Kishida said frankly that the current economic situation is very grim, as if "the head of the bed and the foot of the bed are on fire".
Faced with the dual pressures of exchange rate depreciation and rising inflation, the Bank of Japan and the government began to be busy like a headless fly.
On the one hand, the central bank has increased its efforts to buy yen, trying to "escort" the exchange rate; On the other hand, it is trying to end the era of negative interest rates by adjusting interest rates.
The government has introduced subsidy policies to mitigate the impact of exchange rate depreciation on people's lives.
In 2023, Japan will pay a living allowance of 100,000 yen per citizen, twice as much as the previous year.
In extreme cases, Japan does not rule out using its foreign exchange reserves to intervene in the foreign exchange market.
Once Japan sells off U.S. bonds on an unprecedented scale, will the yen exchange rate bottom out? Can Japan's economy get back on track? These questions are touching the nerves of investors around the world.
3. The reasons and means for the United States to prevent Japan from selling US bonds
When there were rumors that the Bank of Japan might sell US Treasuries, the US reacted like a lion with its tail stepped on.
Treasury Secretary Janet Yellen's rhetoric at the press conference was sharp, as if it were a "national security affair". Why, then, is the U.S. so sensitive to Japan's sell-off of U.S. bonds? What's the mystery behind this?
The biggest concern of the United States is that Japan's debt dumping will trigger a "domino" effect. As we all know, U.S. bonds are the world's largest bond market, with a size of $31 trillion.
Under such a volume, the stability of U.S. bond prices is inseparable from the confidence of overseas investors. The basis of confidence is the long-term "safe-haven asset" status of U.S. bonds.
If Japan, the second largest debtor-holder, were to withdraw first, it would shake the confidence of other countries and trigger a ripple effect.
At that time, U.S. bond yields will soar, the cost of U.S. borrowing will skyrocket, and the economy will be like a shot in the arm, and it will inevitably be weak after the stimulus. This is by no means a situation that the Biden administration would like to see.
What worries the US government even more is that the hegemony of the US dollar is in jeopardy. The reason why the US dollar has been able to maintain the top spot as a "reserve currency" is largely due to the super attractiveness of the US bond market.
If the value of U.S. bonds is questioned, the dollar's international influence may also decline.
The process is like dominoes, interlinked: Japan dumps its debts, triggering other countries to follow suit; The value of U.S. bonds has fallen, and the influence of the U.S. dollar has declined; The position of the US dollar has been shaken, and the global economic landscape has changed. For the United States, this is a big gamble related to the fortunes of the country, and it cannot afford to lose!
In order to prevent Japan from dumping its debts, the US Government began to fight on two fronts, diplomatic and economic.
On the diplomatic front, the U.S.-Japan alliance has become the subject of great efforts by the U.S. side. Since the signing of the U.S.-Japan security treaty, the two countries have forged the bond of military alliance.
According to statistics, the number of US troops stationed in Japan is as high as 54,000, accounting for one-third of the total number of US troops stationed overseas. US officials have said that Japan's sell-off of US bonds will jeopardize the foundation of the alliance between the two sides.
This argument may sound sensational, but it is by no means a lie.
After all, in order to punish France for opposing the Iraq war, the United States did not hesitate to expel France from NATO's military command system.
In the face of military alliances, economic interests are often not worth mentioning.
At the economic level, the United States also has a basket of "killer features". For example, the U.S. could restrict Japanese companies from investing in the U.S. or impose punitive tariffs on Japanese goods.
You must know that the United States is Japan's largest export market, and Japan's annual trade surplus with the United States is as high as 60 billion US dollars.
Once this surplus is completely cut off, the Japanese economy will be cut off from the financial route. In more extreme cases, the United States could even freeze Japanese assets in the United States.
This option is comparable to a "nuclear button" at the economic level, and once activated, the Japanese economy will suffer a devastating blow.
Of course, the United States is not entirely invulnerable. Japan can also use its investment in the United States as a bargaining chip to impact the American economy.
By the end of 2023, Japan's stock of FDI in the United States reached $510 billion, accounting for about 15% of the total foreign investment absorbed by the United States.
In the event of a large-scale withdrawal of investment from Japan, the U.S. job market is likely to suffer. In addition, Japan may also join forces with other countries to promote the "decentralization" of the dollar in global trade.
In recent years, the share of local currency settlements in Japan, China, the European Union, and other economies has been increasing, and if this trend develops further, the international status of the dollar will be shaken.
epilogue
The mountain rain is coming, and the wind is full of buildings. At a time when the global economic landscape is being reshaped, any rash move could trigger a financial tsunami.
When the yen was falling endlessly, the Bank of Japan actually remembered the "killer feature" of selling US bonds. The US Government could not sit still all of a sudden, and the two fronts, diplomatic and economic, went into battle in an effort to prevent Japan from "changing its mind."
Behind this wrestling is a contest between the hegemony of the US dollar and a multipolar monetary system, as well as a game of geopolitical and economic interests.
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