Could the Crashing Yen Trigger Hyperinflation in the U.S.?

Guest Post by Mike Whitney



A cratering yen has set off alarms on Wall Street and in financial centers around the world. If the Bank of Japan sells its behemoth stockpile US Treasuries (now exceeding $1.2 trillion) to support its sagging currency, the US bond market could go into a nosedive dragging the global economy off a cliff. That is why on Friday, July 31, US Treasury Secretary Scott Bessent launched an unprecedented currency intervention to prop up the anemic yen and to forestall an impending financial meltdown. Surprisingly, Bessent implemented a euros-for-yen trade via the New York Fed so as not to weaken the dollar or trigger a selloff in bonds. The gravity of the intervention, however, was not lost on jumpy investors who have connected the dots and understand that America’s $40 trillion debt Ponzi is growing increasingly unstable and could trigger another financial crisis. In short, the teetering yen is merely the canary in the coalmine signaling deeper structural issues that could take down the entire dollar-based house of cards. This is from Forbes:

The wobbling Japanese yen could trigger a global financial crisis…. The yen recently reached a 40-year low against the dollar. The fear is that a further fall in the currency’s value will precipitate a crisis of confidence that will not only set off a serious bout of inflation inside Japan…. but also adversely impact financial markets around the world.

That’s why the U.S. and Japan just undertook a very rare joint intervention in currency markets to prop up the yen. In other words, both countries used dollars to buy the yen.

The intervention has had success. However , most experts believe the relief will be short-lived because of adverse fundamentals in Japan: a too-low short-term interest rate, which is 1% vs. around 3.5% in the U.S.; a national debt that is proportionately twice that of the U.S.; rising energy prices; and a declining and aging population.

The immediate worry for U.S. Treasury Secretary Scott Bessent is that in an effort to save the yen from collapse, Japan will start liquidating its $1.1 trillion portfolio of Treasury bonds and bills, not to mention its holdings of German and British bonds. Such sales would put pressure on interest rates. After all, financing our immense budget deficits and refinancing some $7 trillion of our existing debt that’s coming up for renewal are already worrying the markets. This anxiety, for instance, is why the interest rate on our 30-year Treasury bond has reached its highest level in almost 20 years.

Bessent wants the Federal Reserve to beef up a facility it created in 2020 to deal with a dollar shortage caused by the pandemic and use it now to help the yen. He could also employ a Depression-era facility called the Exchange Stabilization Fund. The idea is that through these devices Japan could borrow dollars using its Treasury holdings as collateral. No sales necessary.

This help is nice, but there are better, more immediate ways to deal with the crisis. Japan should boost its utterly unrealistic short-term interest rate…. Another important thing that both the U.S. and Japan should do… is to announce that they want a stable rate between the dollar and the yen. They might even give a range of, say, 150 to 155 yen to the dollar and make clear that the two countries would massively intervene in the exchange markets to keep it there. Japan would, if necessary, reduce the supply of yen to keep it in that range. These steps would quash the immediate crisis. Japan’s Wobbling Yen Could Trigger A Global Financial Crisis, Forbes

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The United States and Japan are already massively meddling in the market to scare off short sellers who don’t think market fundamentals support a strong yen. In effect, Bessent is saying that if they bet against the yen, they will be crushed by the combined firepower of the Fed and its ally in Japan. In other words, anyone who invests believing that the market is “free and fair” will be clobbered.

Second, the “facility” to which Forbes refers, is another Fed-generated bailout outfit similar to ones created during the Great Financial Crisis.
It is called The Foreign and International Monetary Authorities Repo Facility or FIMA which is operated through the Federal Reserve Bank of New York “To help prop up the yen with dollar loans” in order to discourage Japan from dumping its US debt.

Simply put, it’s a bailout facility. The Fed is issuing dollar-backed loans to prevent the market from rebalancing and to avoid a catastrophic sell-off of US debt that could put the global financial system into downward death spiral.

But will all this meddling work?

Investors don’t think so. Look at this blurb from Reuters:

Fueled by interventions from Tokyo and coordinated action with Washington in recent days, the yen rallied about 4% against the dollar but was not able ‌to reclaim a peak from the previous intervention by the Japanese authorities in May.

Nearly 95% of about 60 respondents in the July 31-August 5 survey said future Japanese currency interventions alone would not sustainably curb the currency’s weakness. Nearly every respondent who said that also said the Bank of Japan would have to raise interest rates to make a lasting impact….

“Intervention … can be effective in slowing the pace of depreciation, reducing excessive market moves and providing short-term support, but history suggests without a change in the underlying fundamentals, its impact fades relatively quickly,” said Ales Koutny, head of international rates at Vanguard. Reuters

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There it is in black and white. They’re going have to raise interest rates which will divert the capital that was going into US Treasuries to Japanese debt instruments. And when America’s Number One buyer of US debt (Japan) starts ditching USTs and purchasing its own sovereign bonds instead, interest rates will rise sharply in the US sending the economy into a protracted slump while ructions in the bond market push the US closed towards insolvency. Here’s more from Leshka at X:

Something much bigger is happening underneath Japan’s financial system. The 2-year government bond yield just reached 1.51%.
Its highest level since 1995. The 10-year yield climbed toward 2.9%. And Japan’s policy rate is now 1%. Its highest level in 31 years.
That means the era of nearly free money in Japan is ending. For decades, investors borrowed cheap yen. Then moved that money into:

U.S. Treasuries. Stocks. Real estate. Crypto. And markets around the world.

Now borrowing in yen is becoming more expensive. And Japanese bonds are finally offering meaningful returns at home. This creates one enormous risk: Japanese capital no longer needs to stay overseas. If that money starts returning to Japan, the global carry trade begins to unwind. Foreign assets get sold. Bond yields rise. Liquidity leaves risk markets. And volatility spreads everywhere. Japan is already showing signs of panic.

The government spent a record ¥6.28 TRILLION defending the yen in a single day in April. Another intervention worth an estimated $95.5 BILLION may have followed in late July. Yet the yen still collapsed toward ¥164 per dollar before recovering. Intervention is buying time. It is not fixing the underlying problem. And now Japan is trapped between two opposite decisions. Raise rates to defend the yen. Or buy more bonds to stop yields from rising.

Prime Minister Sanae Takaichi has already urged the Bank of Japan to increase bond purchases when necessary. But more bond buying weakens the yen. While higher rates increase the cost of servicing Japan’s massive debt.

Fix one problem. Make the other one worse.

Monday will not automatically crash global markets. But it will reveal how much larger Japan’s debt burden has become while borrowing costs are hitting multi-decade highs.

That is the real risk. Leshka.eth

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So, are we headed for another Black Monday?

Who knows, but I suspect that analyst Cory Swan might be onto something when he suggests that Bessent and his fellows are pushing us towards hyperinflation followed by the loss of reserve currency status. In fact, it seems almost inevitable now. Check it out:

“…Japan cannot keep defending forever without selling Treasuries or pushing the Bank of Japan into even more extreme measures. The US just showed that it will use other currencies and its own balance sheet to paper over the pressure because a disorderly yen collapse threatens the entire dollar system. That path leads to more dollar printing, more liquidity, more attempts to manage what cannot be managed. Every one of those moves devalues the dollar, the unit of account that still prices nearly everything. @Cory Swan (start at 53 seconds)

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Regardless of what happens on Monday, the nation’s path has already been charted by Soro’s protégé at Treasury (Bessent) and his esteemed colleagues at the Central Bank. The dollar will weaken, the economy will tumble, and the American people will suffer. That much is certain.

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[ H/T The Burning Platform ]