When Japan became the only "currency manipulator" of the United States

Original Xiao Zhonghua Xiao Zhonghua gave a lecture

The yen has continued to depreciate against the dollar throughout the US interest rate hike cycle and has now depreciated to a new all-time low of 161:1.

Japan has been following the route of a weak yen, and for many years it has been issuing government bonds without stopping, and at the same time it has been printing money with a money printing press, and has become a representative of the so-called MMT practice, which is more typical than the dollar. However, the Bank of Japan also has a bottom line, that is, the bottom line of the yen exchange rate against the dollar is set at 150:1, and if it exceeds this limit, it will have to start intervening. The rationale for this is that a weak yen is good for exports, but if it is devalued too hard, it will undermine the credibility of the local currency and turn the yen into waste paper.

In order to keep the yen weak, Japan has been implementing a policy of zero or negative interest rates, and the current interest rate is only 0.1%. But at the same time, the US interest rate remained at a high level of 5.25%-5.5% after continuous interest rate hikes. Quite simply, as long as there is no regulation, all Japanese people will exchange yen for dollars and deposit them in American banks to earn huge interest rate differentials. What is the difference between the 0.1% interest rate of the yen and the 5.25%-5.5% interest rate of the US dollar? At least a 5250% difference, right?

Here's an example. If you put 16 billion yen in the Bank of Japan with only 16 million yen interest, if you convert it to US dollars, it will be at least 100 million US dollars x 5.25% = 5.25 million US dollars = 840 million yen interest, is there a difference of 5250%?

With such a huge interest rate differential, no matter how stupid the Japanese are, they will rush to exchange yen for dollars and go to the United States to save money. Without intervention, as the Japanese sell off the yen accelerates, the yen will inevitably depreciate further until Japan's foreign exchange reserves are depleted, and the yen will be completely wasted paper.

In order to save the yen, the Bank of Japan had to start intervening in the exchange rate, selling dollars in the foreign exchange market to buy yen in order to stabilize the yen exchange rate. And to sell the dollar, you have to sell the US bond in the bond market in exchange for the dollar. So, we can see that Japan sold $47.4 billion of US bonds in May alone. Because of this, U.S. Treasury Secretary Janet Yellen first sternly warned the Bank of Japan not to sell U.S. bonds, and after the warning failed, Japan was listed as a currency manipulator. And in the latest U.S. exchange rate report, Japan is the only country on the list of currency manipulators.

Japan has no choice but to stop selling US bonds and give up intervening in the foreign exchange market. Then the yen continued to depreciate, from breaking through 150:1 to 161:1, and the depreciation momentum became more and more fierce. It's not hard to imagine what the result would be if this continued.

It is not an exaggeration to say that the United States is Japan's father, but Japan can only be slaughtered by the United States. In fact, China has also dumped US bonds, from $1.1 trillion to just over $700 billion. Yellen and Blinken have been coming to China constantly, and they have never dared to publicly say that China is not allowed to sell US bonds, let alone threaten to be listed as a "currency manipulator" as they have done in the past. Why?

The biggest role of foreign exchange reserves is actually to balance the exchange rate. The equilibrium exchange rate is not about manipulating the exchange rate, but about defending the exchange rate, protecting the credibility and purchasing power of the local currency, and protecting export trade by balancing the exchange rate when the dollar is raising interest rates wildly. If the foreign exchange reserves can only buy US Treasury bonds and cannot be used for anything else, this is actually to help the landlord work forever, earn the landlord's money, and then lend the earned money to the landlord, so that the landlord has more money and hires more people to work for him. Japan can at least buy some advanced weapons and high-tech technology from the United States, and as far as other countries are concerned, the United States hopes that you can only buy US treasury bonds in addition to buying genetically modified grain from the United States. If this state of affairs is not changed, it will be very difficult for the United States to make the country strong and the people rich.

So, foreign exchange reserves are not a bad thing, but buying US Treasuries is not a good thing. The former can benefit oneself, while the latter only benefits the United States.

If Japan is really forced by the coercion of the United States and does not dare to continue selling US bonds, what awaits Japan will be further deflation and recession. In response to U.S. coercion, Fumio Kishida said Japan was simply trying to promote a "growth economy." This means that the Japanese economy has been in recession for twenty or thirty years, and it no longer knows what economic growth is like. Now Japan also wants to return to the track of economic growth, and it is just asking the United States to give it a way out.

The U.S. side did not respond to Kishida's remarks, and seemed to admit only one dead reason: Japan has been listed as the only "currency manipulator" at present, and if it dares to sell US bonds again, it will be punished as a "currency manipulator" treatment, including restrictions on investment in Japan, restrictions on purchases and imports of Japanese goods, and so on.

Japan is not going to make the yen appreciate sharply, and as an export-oriented economy, this has never been Japan's basic national policy. Japan just wants to hold the fundamentals of foreign exchange and keep the bottom line that the local currency does not become waste paper, and its basic goal should be to return the yen to the bottom line of 150:1 against the dollar. If the yen appreciates sharply, it will not only affect its exports, especially Japan's pillar industries such as automobiles, but may also affect the Japanese stock market. As long as the yen appreciates sharply, the dollar capital that has entered the Japanese stock market in large quantities during the yen's depreciation will immediately cash out and run away, which will also lead to Japan's foreign exchange consumption. Japan may also have to sell US bonds to cash out US dollars to pay for the flight of US dollar capital when it is running low on foreign exchange. And this is obviously something that the United States will never agree to.

Against the backdrop of the precarious US national debt and the entire financial system, the United States has only one idea, and will never allow other countries to sell their US bonds, especially its allies. Whoever dares to sell US bonds is a betrayal of the United States, and will immediately turn from an ally into an enemy. Even if Japan just wants to sell US bonds in exchange for dollars to buy back the yen, so that the yen does not continue to depreciate sharply, and try to get the yen back to the bottom line of 150:1 against the dollar.

Allies are used to cushion their backs, and there can be no real monetary and financial sovereignty on their backs. Poor Japan watched itself step by step towards the brink of life and death, but could not extricate itself. The difficult choice is essentially to die first or let your father die first, and the United States, as an ally, will never give you the power to make such a choice. If you dare to let your father die first, your father will definitely want you to die first.

Of course, theoretically, in addition to the intervention method of selling US bonds for dollars to buy back the yen, Japan can also solve the problem by raising interest rates. The dollar will raise interest rates, and the yen will also raise interest rates, so the interest rate differential between the yen and the dollar will not be so large, and the dollar capital flight will not be so crazy.

But the reality is that Japan's national debt is already 250% of its GDP, and such a high level of national debt will inevitably trigger a debt crisis if it raises interest rates. For many years, Japan has been frantically issuing bonds and printing money, relying on the support of negative or zero interest rates, which ensure that the Japanese government's interest burden on government bonds will not be too heavy. Once the U.S. raises interest rates, the huge interest rate on government bonds will immediately bankrupt the Japanese government. After all, the yen is not the dollar, and the debt crisis of the US government caused by the US dollar's interest rate hike is imminent. This naturally means that they will commit suicide before the United States suppresses themselves.

The yen clearly does not want to die before the dollar. In the end, who dies first, or who dies and who doesn't, can only wait to watch the play. One thing is certain, the so-called debt currencies represented by the yen and the dollar, as well as the so-called MMT that underpins this debt money, have gone completely bankrupt. This determines that both the yen and the dollar will have a certain day of death, and all their efforts now are nothing more than not wanting to be the first to die, and wanting to pull each other's backs to delay their own death, and that's it.