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Why Japan's yen is becoming a problem for the US I Business Beyond — Transcript

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0:01Right now, this little piece of paper is
0:04connected to something much bigger.
0:06So big that it can affect things you
0:08care about, your mortgage, your
0:10investments, and even your job. This is
0:12a Japanese yen.
0:15And one country has an especially big
0:17reason to worry about the currency, the
0:19United States.
0:22This July, [music] something
0:23extraordinary happened. The Japanese yen
0:25had reached its weakest level against
0:27the dollar in 40 years.
0:30And for the first time in 28 years, the
0:32US joined Japan in an effort to support
0:35its own currency.
0:38>> We have a good relationship with Japan.
0:41We're very strong, very [music] very
0:42strong financially.
0:44They are, you know, they have a
0:46weakening yen
0:47and they wanted a little bit of help and
0:49we're always there for Japan.
0:50>> But was this really only about helping
0:53Japan?
0:53>> [music]
0:54>> Joint intervention is a big deal. It
0:56hasn't happened with the US and Japan to
0:59strengthen the yen since 1998.
1:02So the fact that the US did this is
1:05quite [music] unusual.
1:07>> And it wasn't just the intervention that
1:08was unusual.
1:10It was also how we found out about it.
1:14This photo.
1:15A Reuters photographer spotted a note
1:17belonging to US Treasury Secretary Scott
1:20Bessent [music]
1:21during Donald Trump's cabinet meeting.
1:24On his to-do list, buy Japanese yen, 5
1:28to 10 billion dollars.
1:30Why does Washington care so much about
1:33the value of Japan's currency?
1:36For decades, Japan has been one of
1:38America's biggest lenders.
1:40Japanese investors have poured huge
1:43amounts of money into the US government
1:45debt.
1:45And America has grown used to that
1:48money.
1:51But now something is fundamentally
1:53changing in Japan. And why that could
1:55become a problem for Washington is what
1:57we are going find out on business
1:59beyond.
2:05To understand why the US is helping
2:07Japan, we need to go back in time more
2:09than 30 years.
2:11In the early 1990s, Japan's economic
2:14bubble burst. What this meant, stock and
2:17real estate prices collapsed, leaving
2:19companies and households with huge
2:21losses.
2:22What followed were decades of weak
2:24growth and falling prices.
2:27>> After Japan's bubble burst around 1990,
2:31[music] the Bank of Japan, the Central
2:33Bank, cut interest rates sharply from
2:35around 6% to zero.
2:38>> This is Rebecca Patterson. She's a
2:40macroeconomic researcher and has spent
2:42more than 25 years working in global
2:44financial markets.
2:46>> So basically, Japan was paying the rest
2:49of the world to borrow in its currency
2:52in the yen.
2:54>> But what does that actually mean? If you
2:56want to borrow money from, let's say the
2:59Japanese government, you will have to
3:01pay a price for that, a percentage of
3:03the amount you borrowed. That's what we
3:06[music] call the interest rate.
3:09The lower that interest rate, the
3:11cheaper it is to borrow money. So by
3:14cutting interest rates, the Bank of
3:16Japan urged companies to borrow, invest,
3:19and get the economy moving again.
3:22>> That made borrowing yen very cheap, and
3:25investors around the world noticed.
3:28>> Imagine I'm an investor. I borrow yen
3:31and pay almost nothing for it. Then I
3:33take those yen and exchange them for
3:36dollars.
3:37And I buy an asset that pays me more
3:39interest, a US government bond for
3:41example.
3:44The difference between the interest I
3:46have to pay for my loan in Japan and the
3:49interest I get for my investment in
3:51America, that's my profit as long as the
3:54dollar remains relatively stable against
3:56the yen.
3:57>> So you're essentially borrowing yen at
3:59close to 0%
4:01and then you get to invest in places
4:02like for instance US, you're getting 3%
4:05you know income return, right?
4:07>> This is Masahiko Lu. He specializes in
4:10bonds, currencies, and has been closely
4:13following the Japanese yen.
4:15>> So at a risk free or like at a normal
4:18environment without any risks right or
4:20risk event you are getting paid around
4:233% per year by just doing this simple
4:25trade, right?
4:26>> And because this trade was so widespread
4:29among investors became known as the yen
4:32carry trade.
4:33>> This went on for decades.
4:36And so when you think about where we are
4:38today, there are literally trillions of
4:41dollars out around the world in what we
4:44call yen carry [music] trade.
4:46>> But cheap money had another consequence
4:49for Japanese investors.
4:50There wasn't much money to be made at
4:52home,
4:53so they looked abroad.
4:55Japanese pension funds, insurers, and
4:57other investors sent enormous amounts of
5:00money into foreign markets. For decades,
5:02Japan became one of the world's biggest
5:04exporters of capital
5:06and it started lending money to other
5:08states.
5:10And guess where a lot of that money
5:11ended up?
5:12Right, the United States.
5:15Today, Japan is the biggest foreign
5:18holder of US government debt
5:20holding over a trillion dollars.
5:23And that is very convenient for
5:25Washington because the US needs people
5:27to keep buying its debt.
5:31This is where the Japanese yen suddenly
5:33becomes a problem for the US.
5:35For decades, the relationship worked.
5:38The US issued bonds, Japan bought them,
5:41and in return the US could finance its
5:44deficits.
5:45But during the COVID pandemic,
5:46everything slowly started to change. In
5:492022, inflation returned to Japan after
5:52decades.
5:54Inflation simply means that prices are
5:56rising and when prices rise faster than
5:58people's incomes, they can afford less
6:01with the money they earn.
6:02For years, Japan had struggled with the
6:04opposite problem. Prices barely moved at
6:07all.
6:08But now, suddenly, the Bank of Japan
6:11faced a very different challenge.
6:13And the weak yen made it worse.
6:16When the yen loses value, you can afford
6:18less with your currency, and things
6:20Japan buys from abroad become more
6:22expensive.
6:24Why is this important? Because Japan
6:26relies heavily on imports, especially
6:29for energy.
6:30Much of that energy, such as crude oil,
6:33comes from the Middle East, and the war
6:35there has led to supply shortages, which
6:37have driven prices even higher. So
6:40higher prices abroad can quickly turn
6:43into higher prices at home. That put
6:45pressure on the Bank of Japan to bring
6:47inflation under control.
6:49So to save the yen, the Bank of Japan
6:51did the unthinkable. It started raising
6:53interest rates.
6:55First in June this year, and then a
6:57second time in September to 1.25%,
7:01a level not seen since 1995.
7:05And that changed the calculation and
7:06sends a signal to Japanese investors.
7:09Why send your money halfway around the
7:11world if you can get a decent return at
7:13home?
7:14That could mean less Japanese demand for
7:16US Treasuries, or even in a more extreme
7:19scenario, Japanese investors sell some
7:22of their US assets and use that money to
7:25buy back [music] bonds in Japan and
7:26strengthen the yen. That's called
7:29repatriation.
7:31And this scenario is very real.
7:34On July 10th, the Japanese Finance
7:36Minister announced that she wanted the
7:38GPIF,
7:40the government pension investment fund
7:42worth $1.8 trillion
7:45to move away from foreign assets into
7:47Japanese assets.
7:50>> The problem with that is what helps
7:52[music] Japan hurts America.
7:54>> Because America needs buyers like the
7:56Japanese pension fund, a lot of them.
7:59The US government is [music] borrowing
8:01enormous amounts of money to deal with
8:03its fiscal debt. For the first time in
8:05history, the US national debt has now
8:07crossed the $40 trillion mark.
8:10[music]
8:12To finance those deficits, the US
8:14government regularly sells bonds to
8:15investors. Those bonds can run short or
8:18long term and are also called
8:21treasuries.
8:22In order to attract investors, those
8:25bonds need to offer competitive returns.
8:27And if demand for those bonds falls,
8:30it can push interest rates even higher.
8:33And that's exactly what is happening.
8:35Look at the US 10-year treasury bond.
8:37Every year, investors of this bond
8:39receive a return expressed as a
8:41percentage. This is also called the
8:43yield. And the yield of this particular
8:46treasury bond reached 5.36%
8:49in early October, its highest level in
8:52more than two decades.
8:54This matters because rising yields
8:57influence borrowing costs across the
8:58economy. So this ultimately affects
9:01ordinary citizens when they need a loan.
9:04>> It makes buying a home more expensive,
9:06borrowing money to grow your company
9:08more expensive.
9:09>> So now imagine losing one of your
9:11biggest customers, Japan. You not only
9:14need to find someone else to buy your
9:16debt,
9:17you probably also need to increase your
9:20interest rates. And right now, that is
9:22the last thing Donald Trump wants. He
9:25was elected on a promise to bring
9:26inflation [music] down. But at the
9:28moment, it is not looking so good.
9:31America is already dealing with high
9:33living costs and prices. [music]
9:35Mortgages are expensive. Businesses face
9:38high borrowing costs. Plus, the war in
9:41the Middle East is weighing heavily on
9:43Americans' wallets.
9:46>> What voters in America care about today,
9:49more than anything else, are their
9:51wallets, their pocketbooks, their
9:53purchasing power. The US has a political
9:55incentive
9:57to get yields down. So it's interesting
10:00right now when we think about an
10:01election in America is so closely tied
10:05to a currency halfway around the world.
10:07>> So this is not just a Japanese currency
10:10story anymore. For Washington, it is
10:13about [music] keeping borrowing costs
10:14under control and keeping Japanese money
10:18invested in America.
10:20So, Washington faces a dilemma.
10:23The yen was falling.
10:24Japan wanted to stop it.
10:26So, remember, Japan can support its
10:29currency by doing the following. It can
10:31sell some of the US assets it owns.
10:34In return, it gets back dollars.
10:37It can then use the dollars to invest in
10:39its own market.
10:41But this is not in the interest of
10:43Washington
10:44because the US then needs to attract new
10:46buyers, offer more money, and this can
10:49lead to higher prices in your own
10:51market.
10:53Washington therefore had an interest in
10:55helping stabilize the yen before things
10:57got out of control.
11:00So, what do you do?
11:01Remember Scott Bessent's tiny to-do list
11:04from the beginning?
11:05Buy Japanese yen.
11:08>> That's a relatively rare occurrence in
11:10the foreign exchange market. Normally,
11:13it it takes place a coordinated
11:15intervention when both Japan and the US
11:18are trying to stabilize the yen.
11:20That takes place once in a generation
11:22basically.
11:23>> This is Bernd Weidensteiner. He's a
11:25senior economist at Commerzbank and
11:27closely follows the US economy and
11:29global financial markets.
11:31>> That was a huge issue at the end of July
11:34where Japan intervened for roughly $80
11:37billion and the US chipped in another 10
11:39or so.
11:40>> But there's another piece to this
11:42puzzle.
11:43Japan itself needs dollars when it
11:45intervenes to support the yen. But where
11:48could those dollars come from?
11:51For emergencies like this, the Federal
11:53Bank built a financial tool. It can give
11:56foreign banks access to dollars without
11:58forcing them to immediately sell their
12:00US Treasuries. It's called the FEMA Repo
12:03Facility.
12:04The name sounds complicated. [music]
12:06The idea isn't. Japan can temporarily
12:09put up US Treasuries as collateral.
12:11And in return,
12:13it gets dollars.
12:14It can then use those dollars without
12:16first dumping its treasuries onto the
12:19market.
12:20And later, it returns the dollars and
12:23gets its bonds back.
12:24This way, Japan doesn't need to sell its
12:27US treasuries.
12:29For Washington, the goal is simple. Help
12:31Japan stabilize its currency, but it
12:34wants Japan to do it without
12:35destabilizing the US treasury market.
12:39[music]
12:43So a stronger yen solves the problem?
12:46Not quite because there's another side
12:48to the story.
12:50Remember those trillions of dollars tied
12:52to trades funded with cheap yen? The yen
12:55carry trade.
12:57Those trades work well when the yen
12:59stays cheap.
13:02But if the yen suddenly gets much
13:04[music] stronger, they can start losing
13:06money.
13:07And investors may rush for the exit.
13:09They sell the stocks, bonds, and other
13:12investments they bought with borrowed
13:14yen.
13:16>> The risk for not just the United States,
13:19I would argue the risk for the world
13:21including Europe
13:22is that this yen carry trade is unwound
13:26quickly. Now, I think that risk is quite
13:29low, but it's not zero.
13:31>> And this can create a chain reaction.
13:33One investor sells,
13:35then another, and the yen gets even
13:38stronger.
13:39>> If this happens in a quick way, we would
13:42see all the markets that benefited from
13:44that trade also fall in value.
13:47>> And we have seen versions of this
13:49before. Again and again, major global
13:52shocks have triggered sharp moves in the
13:54yen, sometimes forcing investors to
13:57unwind [music] trades built on cheap
13:59Japanese money.
14:00And there's one recent example.
14:02In August 2024, the yen surged.
14:05Investors rushed to unwind [music] carry
14:08trades, and stock markets around the
14:10world suddenly came under pressure. But
14:12there's one big difference [music] this
14:14time.
14:15Those earlier yen surges were largely
14:17the result of crises. This time, the
14:20stronger yen is partly [music] the
14:21policy goal, and that is what makes the
14:24situation so unusual.
14:28So now we can see the trap.
14:30If the yen gets weak, Japan
14:33has a problem.
14:35Imports become more expensive, inflation
14:38rises, and Japan may have to intervene,
14:41and that could put US Treasuries under
14:43pressure.
14:44But if the yen gets too strong too
14:46quickly, investors may rush to unwind
14:49trillions of dollars in yen-funded
14:51trades. Stocks and bonds around the
14:53world could suddenly lose value.
14:57Too weak is dangerous. Too strong can
15:01also be too dangerous. So Washington
15:03wants something in between,
15:05a stable yen.
15:07But the US does not control the yen.
15:10The Bank of Japan controls Japanese
15:13interest [music] rates. Japanese
15:14investors decide where to borrow and put
15:17their money.
15:19Washington can influence those
15:21decisions, as we have seen with
15:23Bessent's note, but it cannot dictate
15:26them.
15:27>> Intervention can be helpful, but it has
15:29to be accompanied by policy change.
15:32>> And Japan is changing policy. Interest
15:36rates are rising. Japanese bonds are
15:38becoming more attractive.
15:41>> So Japanese investors no longer have to
15:43aggressively go overseas and buy
15:45overseas assets because they can earn
15:47income in Japan.
15:49>> That does not mean Japan will suddenly
15:51sell everything it owns abroad. The
15:54change could mean something more subtle.
15:56>> I think the dilemma of Japan is not
15:58really no longer dilemma. It's more
16:00about Japan being uninvestable in the
16:03past 30 years and becoming investable.
16:06>> And that is a structural change
16:08financial markets have to absorb,
16:10including the United States.
16:14So
16:15why does the Japanese yen matter so much
16:18to Donald Trump and the United States?
16:21For decades, Japan provided the world
16:24with something incredibly valuable,
16:26cheap money.
16:28And the United States benefited
16:29enormously.
16:31Japan bought American debt.
16:33Investors borrowed Yen to buy American
16:35assets.
16:36America got used to that money.
16:39But Japan is changing. Inflation has
16:42returned. Interest rates are rising.
16:44[music]
16:45And that means Japanese money may become
16:47more valuable at home.
16:50For the United States, that creates a
16:52difficult balancing act. A weakening Yen
16:55could put pressure on Japan to sell US
16:57assets. A Yen that strengthens too
17:00quickly could trigger an unwinding of
17:02the carry trade.
17:04Both scenarios can create problems for
17:06the US and Donald Trump.
17:08At a time when Americans are worried
17:11about the costs of living.
17:12>> Overall for for the US, the domestic
17:15economy always is more important than
17:16the foreign economy, yeah. For Japan,
17:19it's basically maybe
17:20in part the other way around, they have
17:23to have an eye on the foreign economy,
17:25on the exchange rate, on the relative
17:27yield developments. The US is still the
17:29gorilla in the global economic zoo, so
17:33to speak.
17:34But even a gorilla can
17:36become ill, yeah.
17:38>> So it was not simply about helping
17:40Japan. And that may be the real Yen trap
17:42for Donald Trump.
17:45For decades, the US benefited from
17:47Japan's cheap money.
17:50Now Japan may need that money
17:54for itself.

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