| Good morning. The two big questions about Friday’s US intervention to support the Japanese yen: what is this trying to achieve, and will it work? Our thoughts are below. Yours are welcome as ever: unhedged@ft.com  <img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/t/2/47857/ffff@berkeley.edu/5817747077646525/0/0'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/47857/ffff@berkeley.edu/5817747077646525?pid=1'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/47857/ffff@berkeley.edu/5817747077646525?pid=2'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/47857/ffff@berkeley.edu/5817747077646525?pid=3'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/47857/ffff@berkeley.edu/5817747077646525?pid=4'> |  |
The US’s first joint intervention with Japan in the yen in nearly 30 years has kind of worked, for now at least. The dollar is trading at about ¥156, a far cry from the peak of about ¥164 last week. Will this last? No idea. But it’s worth putting more thought into why this is happening at all. One possible explanation is that it’s just nice to be nice. As Donald Trump himself put it, “they have a weakening yen, and they wanted a little bit of help, and we’re always there for Japan. Japan’s been very good to us, with the exception, of course, of Pearl Harbor.” Honestly, we can’t top that. What a time to be alive. Both Japanese finance minister Satsuki Katayama and US Treasury secretary Scott Bessent have pledged to engage in further public displays of friendship, if market conditions demand it. A friend in need is a friend indeed. This, to me, is a form of buddynomics. If a country is “in” with the US administration — a friendly Asian or Gulf state with a possible need for swap lines, for example, or an Argentine president keen to keep a currency in check in the run-up to an election — then Bessent is your man. Japan, it seems, is part of the in-crowd. There’s nothing super weird about that — geopolitical alliances have always been a thing and have always greased the wheels of global finance. But it’s perhaps a little more in-your-face than usual. Niceness is one thing, but the best explanation is rational self-interest. As we explained in yesterday’s newsletter, Japan has two traditional routes to push up the battered yen. One is a massive rise in Japanese interest rates, and the other is massive sales of dollars — ie of US Treasuries. Neither of these would be good news for the US. Higher Japanese interest rates have been a simmering risk to global government bond markets for the past few years. Japanese government bond yields are already seriously elevated by historical standards — 2.8 per cent on the 10-year, and 4 per cent on the 30-year. This is nosebleed territory for a market that hovered close to zero per cent, doing nothing of any interest at all, for yonks. The situation is already at the point where global money managers are wondering when Japanese investors will stop bothering to put money to work overseas (eg in the US and Europe) and just stay at home, and whether investors elsewhere (again in the US and Europe) might consider putting more money to work in the Japanese market. Either way, this means less money heading in the direction of Treasuries. Lots of investors are surprised that this reversal still hasn’t yet made itself felt. It’s the big macro risk that just never bites. But much higher benchmark interest rates in Japan could change that. The US is just not in a position to lose a big buyer of Treasuries when, for entirely homegrown reasons, its own 10-year yield is tickling 4.7 per cent and the 30-year is well over 5. And it certainly can’t tolerate a big seller of Treasuries, in the form of Japanese authorities selling dollars, hoping to prop up the yen. (It’s worth bearing in mind that Japan’s Treasury holdings lead the world, at a cool $1tn, or something under 4 per cent of the total outstanding.) Much better to stand behind Japan like a scary big brother and hope to scare off the yen sellers. The US portion of Friday’s joint intervention may have been small (and it was in euros, seemingly because euros and yen are what the US has in its Exchange Stabilization Fund). But the signalling is very clear: Back Off. This might well work all on its own. “The risk-reward of trying to push [dollar-yen] to 160 now is much less,” said Yusuke Miyairi at Nomura. There is another element here that suggests the underlying target of this exercise is US Treasuries. Japan’s finmin has said future efforts to support the yen will use a Fed tool called the Foreign and International Monetary Authorities Repo Facility, or Fima. The Fed describes Fima as follows (emphasis ours): A temporary backstop source of temporary dollar liquidity . . . [that] can help address pressures in global dollar funding markets that could otherwise affect financial market conditions in the United States . . . approved FIMA account holders [can] temporarily exchange their US Treasury securities held with the Federal Reserve for US dollars, which can then be made available to institutions in their jurisdictions. This facility provides, at a backstop rate, an alternative temporary source of US dollars for foreign official holders of Treasury securities other than sales of the securities in the open market. Bessent has also said he will encourage the Fed to bump up Fima’s firepower in the coming months. Adam Josephson at Sakonnet Research stresses how infrequently this tool has been wheeled out since it was established during the 2020 Covid shock. Its current $60bn per counterparty, per day limit has been reached just once. Josephson’s chart: Goldman Sachs cut right to the point in a note yesterday: The fact that US authorities approved the use of this facility suggests the US side sees potential risk that fx intervention could push up US Treasury yields. This is not the first time the US has indicated some sensitivity about overseas demand for Treasuries. Recall its rather prickly reaction when Danish investors suggested they might back away from US assets unless the US backed away from Greenland. So, in a way, this is less of an intervention to support the yen and more of an intervention to support Treasuries. At the very least, self-preservation is very much at play. But as Miyairi at Nomura noted to me yesterday, what would really help is a weak payrolls number from the US on Friday and/or a surprisingly hawkish rate rise from the Bank of Japan in September. I’d add to that list: more comprehensible messaging from the Fed. And if the intervention itself doesn’t work? Here’s Daleep Singh, chief global economist at PGIM: The spillover effects in the Treasury long end, and potentially Fed policy, would be significant. Not because Japan dumps dollar assets in a fire sale — I’d say that’s a remote risk — but because speculators might amplify the reversal by aggressively selling yen and USTs together to force the BoJ and Fed into precautionary rate hikes. So strap in. Yikes.  <img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/t/2/40827/ffff@berkeley.edu/8175842081734281/0/0'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/40827/ffff@berkeley.edu/8175842081734281?pid=1'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/40827/ffff@berkeley.edu/8175842081734281?pid=2'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/40827/ffff@berkeley.edu/8175842081734281?pid=3'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/40827/ffff@berkeley.edu/8175842081734281?pid=4'> |  |
Playbooks, plagiarism and a pig’s head. | 
