Lately, I've been closely watching the Bank of Japan's (BoJ) and US-backed currency interventions to halt the historic decline of the Japanese Yen. To put this into perspective, these moves, which involve burning billions of dollars, are neither sustainable nor rational.
Japan has a structural and very deep economic breakdown. However, instead of addressing the root cause, decision-makers are only trying to save the day and buffer the bleeding by selling foreign currency into the market. This is not a solution; it's postponing the cost of the crisis to the future, and this accumulated stress will sooner or later lead to a much more severe breakdown.
The most tragicomic aspect is the dead end Japan has created for itself. For years, they swept interest rates to the ground, claiming "we don't have inflation, we're fighting deflation." They flooded the market with unprecedented stimulus and free money to encourage household spending and stimulate the economy. Now, the structure they created is completely locked up when faced with real and persistent inflation. Under normal circumstances, the only thing a central bank should do in the face of inflation is to raise interest rates to a satisfactory level. However, instead of making this fundamental move, they continue to suppress interest rates and try to keep the exchange rate afloat with artificial interventions.
Why are they doing this? There are two possibilities, both problematic:
Firstly, decision-makers probably have an optimistic outlook: "Global growth is slowing, and if oil prices fall, the cost inflation we import will naturally subside, and we will get through this cycle without having to raise interest rates." If this is the plan, it means a very dangerous macro gamble is being played. In a world where geopolitical fault lines are so tense, basing the entire strategy on falling oil prices is sheer madness. (Some will say, "Doesn't America trust this?" America doesn't have the problems Japan has.)
Secondly, and far more frighteningly, if these interventions are being made to prevent the collapse of the famous "Carry Trade" positions, which are the lifeblood of the global financial system, then we are about to hit a much bigger wall. For years, there has been a system of trillions of dollars borrowing in yen at zero interest and investing it in US bonds, technology stocks, or emerging markets. If the Bank of Japan (BoJ) were to raise interest rates suddenly instead of gradually, and the yen were to appreciate abruptly, these carry trade positions would have to be closed quickly. This would create a massive sell-off and liquidity crisis that would shake not only Japan but the entire global market. The BoJ is currently holding a ticking time bomb.
In short, they have fallen into their own massive debt and zero-interest trap. Instead of treating the disease (raising interest rates), constantly administering painkillers (selling foreign currency) to mask the symptoms will eventually lead to the patient's demise. You can save the day, but you can't defy market dynamics; this artificial dam will inevitably collapse in the end.
