BREAKING Japan Just Lost Control of Its Currency

The Japanese Yen just fell to a 40 year low and that has everyone talking. It has the government worried because no one can figure out what's really going on. What's really important is not the level of the exchange rate. What does matter is the fact that the Japanese authorities, the government, the Ministry of Finance, the central bank, have all been throwing things at the currency to try to stop its slide. And instead, the real issue here is that the government is being run over by a currency with a story to tell. The Bank of Japan ended its negative interest rate experiment in 2024. Then the Yen kept going. On June 16th of this year, BOJ raised its benchmark rate to 1%, the highest level since 1995. That should have helped JPY, at least that's what we're being told. Tokyo massively intervened in the foreign exchange market. From late April to late May, the government spent a record 11.73 trillion yen, or about $72.5 billion US dollar equivalent, trying to support the currency. It didn't work. JPY keeps falling anyway. But there are more angles to this story. It's not entirely that Japan has a currency problem, even after the rate hikes, even after the intervention, the official warnings, policy makers who constantly promise bold action. The Yen is falling at the same time Chinese bond yields are making new lows. China and Japan are not so far apart, and I don't just mean geographically. For example, Chinese asset managers right now are reviewing their bond portfolios for a wave of possible rating downgrades, putting even more pressure on banks, on local growth, the entire region, just as a start. That combination tells us something extremely important about more than just China and Japan. The world, the entire world, is not moving in a clean, reflationary recovery angle, even though the energy shock may be winding down. The underlying EURUSD conditions have not changed. Dollar pressure is still there, Asian currencies are still under strain, and China's bond market is still warning about weak global demand, weak internal credit, and overall deflationary pressure. In other words, the Yen and China's bond market are two sides of the same EURUSD coin. The Japanese, the Yen is showing that pressure externally, China's bond rates, the bull steepening there showing the pressure internally, and both of them are saying the same thing. After the energy shock is winding down, the world is still not right. The Yen is not just another currency, it's one of the most important financial signals in the world. Japan is a massive creditor nation, its banks, its insurance companies, the pension funds, the corporations, and of course, just regular everyday investors, they're all deeply connected to global marketplaces. The Yen is also heavily used in carry trades, there's funding trades, there's of course global risk positioning. So when the Yen moves sharply, it's not really just about Japan, it can tell you something about global dollar liquidity, and just as importantly, the risk appetite. We get a sense of trade flows and the stress level inside the broader EURUSD system, and that's why this latest move really matters. The Yen weakened to around 161.96, almost 162 versus the dollar, passing the 161.95 level that was reached in July of 2024, back when Japan was already running a campaign trying to defend the exchange rate. Here we are two years later, and what do they have to show for it? This is a big psychological break. Markets remember these levels, and so does the government. Finance Minister Satsuki Katayama said authorities remain prepared to take, quote, bold action against excessive speculative moves. Japan has also been in discussion with the United States, with officials saying Tokyo and Washington are increasingly aligned on foreign exchange policy. And that sounds powerful, but there's a huge difference between sounding powerful and actually changing the underlying monetary conditions. Japan can threaten speculators, it can intervene selling dollars and buying Yen, it can create a sudden rally in the currency for a few hours, maybe a few days, possibly a couple of weeks. But if the underlying demand for dollars hasn't changed, the pressure is always going to be there. It's going to seem like it comes right back. And that's exactly what we are seeing. The fact that JPY keeps sinking despite everything thrown at it, that's the story. If you have a retirement account, and if you've ever wondered whether crypto belongs inside of it, BlockTrust IRA is something worth looking into. Now, most crypto IRA platforms are self-directed. They give you access, but you have to decide what to buy, when to sell, when to rebalance. BlockTrust IRA is different. 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Of course, the mainstream explanation is always interest rate differentials, and mainstream usually refers to central bank policy rates more than anything else, because we've got to keep up the myth that central banks control the world. When it's very clear, at least it should be very clear, they don't. The idea is the Fed might be more hawkish, and therefore U.S. dollar interest rates are going to be higher for longer, making the yen less attractive. That's the story that we're supposed to go with. But yet, the currency, the exchange rate, and not just for the yen, is telling a very different one. Now, there is some truth to this. The rate differentials can matter, as do carry trades, which means investors in Japan with deep pockets and tons of collateral, they swap into dollars and put their money to use somewhere else, which also tends to weaken the yen. But this explanation is incomplete, because Japan already has changed its policy dramatically. The Bank of Japan, as I mentioned in the introduction here, ended its negative rates back in 2024. That was supposed to mark the beginning of a new era. After years of what they call ultra-easy policy, Japan was finally moving away from all that. By the time we get to June of 2026, when the Bank of Japan raised rates again, it brought its benchmark rate up to 1%, which was the highest for that policy since 1995, which sounds huge. So if this were only about the BOJ being too easy, according to the textbook, the yen should have responded more forcefully, or should have responded anywhere at all. But it hasn't. The yen keeps falling no matter what. That tells us the market is looking beyond Japanese policy rates. Traders are not just comparing the BOJ to the Fed in a simple spreadsheet. They are looking comprehensively at the entire system. They're looking at dollar demand. They're looking at energy, what that shows. The market sees what's going on in China and what that means for at least Asian growth as a start. The Japanese government spent a record 11.73 trillion yen between April 28 and May 27. That was after the yen first slid past the 160 to the dollar. And to fund that intervention, Japan drew on foreign security holdings including U.S. Treasuries, which is the mechanical relationship I told you about not that long ago. They sell treasuries in response to dollar shortage, and here is another example of it. And the U.S. dollar exchange value tends to be rising in these situations. In very simple terms, Japan sold dollar assets to get dollars, which means it supplied those dollars in the marketplace and bought yen as a result. That intervention can work temporarily as it did in this case. When a government suddenly buys its own currency in huge size, it can shock the market by triggering the short covering. It does create a dramatic move on the chart, and we see it again in the example here. But that intervention does not change the monetary regime, and the monetary regime is not for central bankers. It doesn't change the global dollar supply or recirculation. It doesn't change Japan's energy import needs. China's credit problems don't just magically go away. It doesn't make the euro-dollar system reflationary. Japan draws a line. The market backs away. The pressure builds again. The yen returns to the same level or even surpasses it. Then officials, here we are once all over again, issue yet another warning, rinse and repeat as the exchange rate keeps moving down and to the right over time, just not in a straight line. Now, this is where the story really gets interesting, because the last couple of months, the yen's weakness was tied, as it should have been, to the energy shock. Rising oil prices, therefore, bigger import bills, meaning more demand for dollars. However, as the energy shock starts to fade away, hopefully continues to fade away, and oil prices continue to normalize, it's not normalizing or reversing the fate of JPY. Japan imports most of its energy needs, and oil's priced in dollars. So when oil prices spiked, as they did substantially a couple months ago, Japan needed more dollars to buy the same amount of energy. So that created additional dollar demand, and more dollar demand weakens the yen. A weaker yen then makes dollar-priced imports even more expensive. So it's not just about energy. There's already some spillover effect, which can become a vicious cycle. But now that oil prices have been coming back down, and the energy shock appears closer to ending, why is the yen still falling? That's the key point. You've got government interventions that didn't work. The energy shock is fading away, and JPY is setting a 40-year low. If the yen were only reacting to oil, then falling oil should have provided some kind of meaningful relief. If the global system were moving into reflation after the energy shock, those lower oil prices should have helped stabilize the Asian currencies. Japan should have gained some breathing room here. But that didn't happen. The yen keeps falling anyway. So that tells us, the problem is deeper than strictly oil. Falling oil can mean relief from the energy shock, but it can also mean something else. We've talked about this before. Demand destruction. If oil falls because supply improves and growth stays strong, that's positive. But if oil is down because the world economy is deteriorating, trade is weakening, and demand destruction is spreading, that's not reflationary. That's the signals that we're getting here. That's more deflationary. And the markets that understand this best are not equities, at least certain equities. They're more often than not the bond markets, and especially China's. At the same time the yen is breaking down, Chinese bond yields are falling to new lows. Now, just like we hear with the yen, it's about central bank policies. Many people take, especially front end yield curve rates, shorter term, shorter duration instruments. They take the yields on those to mean the market is pricing X amount of more easing from this case, the PBOC. That could not be further from the case. That's what you'll hear. Lower bond rates means more easing from a central bank that don't actually ease anything. Rates go down as the economy sinks, with the central bank adjusting its policy rates following along. Following along. Now, as we know, China is the center of Asian manufacturing and regional trade. It's deeply connected to commodity demand, global supply chains, and as I talked about recently, the dollar flows through Hong Kong and the rest of Asia that have been flowing out of Hong Kong for the last couple of months. So when Chinese bond yields fall, especially to new more than year lows, that's not some random local event. It is another global signal. Chinese bonds, the Chinese bond curve is bull steepening. That means bond prices are rising, yields are falling, and the curve is changing shape in a way that usually reflects expectations for weaker growth, the opposite of what we should be seeing if the economy was turning around after the energy shock. In a strongly reflationary environment, you would expect something different. You would expect yields to rise because growth expectations are improving. You would expect credit demand to strengthen and for investors to move away from safe assets and roll and rotate into riskier ones. There would be expectations that China's economy will pull Asia forward. Instead, Chinese bonds are rallying. That's not a sign of confidence. It's not a sign of central bank rate cuts. It's a sign that investors are looking for safety and liquidity and duration in an economy for a world that still has serious problems, and those problems are becoming harder to hide. Now, Chinese asset managers, for example, and this is a really important story, they're reportedly reviewing their bond holdings to identify issuers that are at risk of ratings downgrades, especially as regulators are pushing back hard against what they call an over concentration of AAA ratings. That's important because it shows credit risk is not just theoretical. Institutions are looking at their portfolios and asking which corporate and bank bonds are actually safe. Which issuers could be downgraded? Where are the ratings too generous? So in not getting any answers that they like, they're piling into safety and liquidity into the government bonds. That's not the behavior of a booming economy. It's the behavior of a financial system that is actively retreating. Now, this is the central point. The yen at a 40 year low and the bull steepening in Chinese bonds are actually the same signal from different perspectives, different parts of the same region, different countries, different languages, yet speaking in the same way. The yen is showing external pressure. China's bond market is showing internal pressure. The yen says dollar conditions are still tightening and tight enough to punish a major Asian currency even after local rate hikes and government interventions out of Tokyo. Chinese bonds say growth and credit conditions are weak enough that investors still want more and more safety at lower and lower rates, even with oil coming back down. So the fact that both of these are saying the same things from different perspectives, two sides of the same euro dollar coin, is tremendously compelling. This is not the global reflation everyone assumed after the oil spike dissipated, where the energy shock ends and everything just goes right back to normal. Instead, the energy shock may have exposed and even accelerated the weaknesses that were already there that we've been talking about for a while here. The fragile labor markets, weak consumer demand, property stress, credit caution, and of course, a global dollar system that still doesn't provide enough elasticity when the stress appears. That's the euro dollar problem. When that system is healthy, global trade and finance expands. When the system is strained, everyone starts scrambling for dollars. That's the signals we keep getting. And when everyone scrambles for dollars, currencies like the yen come under pressure. It's not always obvious. It doesn't always look like a crisis. Sometimes it shows up as a currency move or in these falling bond yields. You get weakening commodity demand, which has showed up again. Rating concerns, they start to materialize. Even the stock market divergence like we see with Hang Seng. That's an important key critical signal too. But the message is the same. Dollar conditions are not easing up. Let me say that again. Despite the dissipation of the energy shock, at least what we hope is that, dollar conditions are not easing up. Two major signals and a lot of stuff to go along with them that are not signaling reflation. And of course, for a lot of reasons, including that, Japanese, the government there, officials are increasingly worried about this, as are officials in China. For Japan, a weaker yen raises import costs even higher. It squeezes households that have been struggling for years already, it pressures small businesses, making energy and food more expensive for the Japanese. So officials over there are going to keep talking tough. They're going to keep saying they're watching markets carefully, authorities will warn against excessive and speculative moves, what they call one-sided moves. They're probably going to end up intervening again. They're going to talk about their coordination language with the United States. But the truth is, the government has a very limited toolkit. If it intervenes, it's going to spend its reserves. Rate hikes don't do anything. If the government just blames speculators, it could win a headline. But it doesn't change the underlying dollar demand, which is why the phrase bold action sounds dramatic, but it's not really decisive. The whole point is how it sounds. The market doesn't care about boldness, it cares about balance sheets and funding fluidity. It cares about whether Japan, China, and the rest of Asia are moving into stronger nominal growth or potentially deeper monetary caution. And right now, the yen and Chinese bonds are saying it's the latter one, it's the caution. So the yen falling to a 40-year low is not just a currency story, it's a global warning. Japan raised rates, the yen kept falling. Japan spent records amounts defending the currency, the yen kept falling. Officials threatened bold action, the yen kept falling, oil prices eased. Say it with me, the yen kept falling. Now at the same time, China's bond yields are also falling, China's credit concerns are rising, and Asia's largest economies are showing signs of stress from different directions. That's why these things matter, especially together. Yen is not telling us that Japan has a weak currency problem, it's telling us the Eurodollar system is still not reflationary. It's telling us the dollar pressure remains and that China's bond market is not confirming the global recovery story either. And remember this, falling oil doesn't necessarily have to be just supply normalization after an energy shock. It can also be falling demand or maybe even destroyed demand. So Japan's currency at a 40-year low plus China's bond market bull steepening really are two sides of the same Eurodollar coin that has been flipped up in the air and is not coming up reflation. If you enjoyed this video, I've got another one for you that will help explain what we do here, what we really do here at Eurodollar University, our methodology, why we focus on the curves and signals that we do, and just as importantly, why no one else does. And at the end of that video, I put it into a context of how to use this useful information managing money. There's a link on the screen for you to follow.