The US Bails Out Japan
▻https://www.tftc.io/us-bails-out-japan
The inability of the Bank of Japan to prevent the yen from running higher (read: rapidly debase) has obviously spooked the US Treasury and the Federal Reserve because yesterday morning it was announced that the US and Japan had agreed on an FX intervention plan via a swap line through which the US will supply Japan with dollars in exchange for yen. The reason the US is stepping up to help with this intervention is because Japan is the largest holder of US treasuries in the world and the last thing the US needs right now is for Japan to begin selling its treasuries en masse so they can get dollars to defend the yen. I imagine the conversation went something like this, “Don’t touch those treasuries. We’ll just give you the dollars.”
While it may not seem like a very big deal to most, this is a strong signal that something is terribly wrong in both the Japanese and US economies. The Japanese have lost control of their yield curve, which they have been able to successfully manage via extraordinary monetary measures for decades. The pressure being put on them via the Federal Reserve holding rates for as high as they have and as long as they have is immense and there is little they can do to turn the tide at the moment. The Treasury and Fed over here in the US are petrified of more instability within the treasury markets because stable treasuries prices are critical to the smooth facilitation of the banking sector. The Spring of last year made it abundantly clear that banks aren’t sufficiently capitalized to weather declining treasury prices.
With lackluster bond auctions becoming more common for the Treasury and the largest holder of bonds in the world getting to the point of forced selling, it makes sense that the US stepped in to bail out the Bank of Japan. They need to make the markets believe that everything is fine.
This situation becomes even more precarious when you factor in the fact that inflation has most certainly not been tamed here in the US. The Fed would like to keep rates elevated for much longer in an attempt to bring prices down as much as possible. Excuse me, scratch that, to make sure prices rise a bit slower than they have been for an extended period of time.