The US Treasury Needs a Strong Yen Carry Trade

Expanding on John Rubino's "Japan Is In That Box"

My good friend John Rubino wrote an excellent piece yesterday explaining that the Bank of Japan is faced with an impossible dilemma. With the aggressive rate rising policies of the Powell Fed and with Japan engaging in the suppression of interest rates, the Japanese yen has been very weak starting in January of this year.

Yen weakness was caused in part by the aggressive interest rate policies of the Fed and that weakness was likely the trigger that caused the BOJ to discontinue controlling Japanese 10-Year Treasury rate at ~0.50% starting in August. With Japan a major importer of energy, a weak currency obviously leads to Japanese inflation. To keep yen rates artificially low the BOJ has had to buy huge amounts of Japanese debt such at currently it owns approximately half of all Japanesee Treasuries. To attract other possible buyers and to hold inflation down, it might make sense for Japan to allow its treasury rates to rise.

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On the other hand, the Japanese stock market has entered bear market territory so rising rates now isn’t helpful to equity investors.

But there is one more dynamic that Japan is burdened with. Under the thumb of the U.S. it must comply with the liquidity needs of the United States. As I noted in my recent article titled “Gordon Long on Investing in a New World Order” the U.S. has relied on the Japanese carry trade as an enormous of U.S. Treasury funding. With U.S. rates approximately 4% higher than Japanese rates, pension funds, banks and other major institutions can borrow yen, convert to dollars and buy U.S. Treasuries, making a spread of approximately 4%. In addition, these major players are able to leverage up 3 or 4 times to earn margins in the 12% to 16% range! The volume of US treasuries purchased via the yen carry trade has been enormous in the past but now with an increasing number of foreignors sellig U.S. Treasureis to buy gold at the same time U.S. borrowing needs are going exponential, the U.S. needs a strong yen carry trade more than ever.

But, for the yen carry trade to work, a stable yen/dollar exchange rate is required whch may be at least one reason the BOJ is has given up on yield curve control. As Gordon Long recently suggested, the Biden Administration may put pressure on the Japanese to orchestrate rate and foreign exchange policies that enables a revival of the yen carry trade, especially as the 2024 Presidential election draws near. In other words, as a vassal state of the U.S. the box Japan finds itself in that John Rubino talked about may not be entirely of its own doing.

John ended his article asking, “Are we about to see a three-pronged attack in which the BOJ simultaneously buys stocks, bonds, and yen with newly-created currency? Very possibly. The result? At least one and maybe all three markets implode, ending the experiment. Stay tuned.”

When the U.S. abandoned the gold standard in 1971 I recall my professors at Baruch College in New York City being all excited about getting rid of gold in the monetary system so that endless amounts of liquidity could be created to stimulate endless amounts of wealth. That did seem to work pretty well for a long time as long as foreigners were buyng our Treasuries. Not taken into account is the need for free markets to limit boundless greed inherent in the human species. Gold was created by God to enable humans to function in a fair, stable and egalitarian monetary system. Letting the Fed and the government control money rather than free markets is like putting the fox in charge of the chiken coup.

With fiat money now resulting a relatively few billionares controlling our political and monetary systems, about the only action we individuals can engage in to protect our personal wealth is to exchange fiat for honest money—gold and silver. Then we must pray that the Marxists that now control most of the institutions of the American goverment allow us “little people” to retain at least some of our life sustaining property. For now, if a strong yen carry trade evolves, the fiat game may contnue a bit longer providing some more time to prepare the destructive fires of hyperinflation that most certainly lie sometime in our future.

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