Transcription
All right, guys. So, the Japanese yen is still collapsing, and that's actually the main reason why I went there for vacation. I just got back, and things are literally 10 to 30% cheaper right now because of the crashing currency. Now, it's great for tourists like me, but absolutely horrible for local Japanese people just trying to pay their bills.
And with Trump's latest threat of a prolonged war resumption, the energy crisis is about to research with devastating force all over again. Now, Japan's going to get hammered once more, and we genuinely have no idea how long Trump plans to keep waging this pointless conflict.
"Mr. President, you know that the United States is bombing Iran again. I mean, that you've been bombing Iran for months now. Is this just the new normal for the American?"
"No. Well, you know, we were in Vietnam for 19 years. We're here for 4 months. So, I think we've done a lot. We've knocked out their navy in a period of..."
Now, Japan's currency is now completely at the mercy of US actions. They're simultaneously facing higher rates from the Fed and a brand new energy crisis hitting at the same time. And there's only so much the Japanese government can keep subsidizing before something breaks completely. This is not looking good.
For over 4 years now, the yen has been crashing relentlessly against the US dollar without any sustained recovery period. Now, this happened even after Japan spent over $70 billion in direct currency intervention. They were trying to rescue it, but that isn't working. And that enormous sum accomplished absolutely nothing lasting.
Now, this setup is draining Japan of their remaining reserves while simultaneously crushing ordinary consumers who have no protection from all the rising import costs. For a major energy and food importing nation, this creates a horrible binary choice with no good outcome for them. So, Japan either consumes significantly less across the board, or the government keeps spending borrowed money on subsidies that they simply cannot afford indefinitely. Because if they do need them, it won't just be foreign investors running away. Domestic consumer spending is going to dry up completely and pull the economy into a painful contraction, aka a recession.
Now, the data makes this impossible to deny. Japanese household spending fell by 0.4% year-on-year in May. Now, this is the sixth consecutive monthly decline in a row. Six months straight of falling consumption. Now, the downward trend shows absolutely no sign of reversing on its own momentum. Government relief packages are optimistic. Public promises clearly aren't restoring genuine confidence, right? People around Japan, they just don't have the confidence to buy because their purchasing power is eroding steadily. Now, people are actively conserving money because they know the subsidies will eventually end. And when fiscal limits are reached, it's game over.
And Japanese companies are under genuine pressure the longer this currency crisis drags on without resolution. Now, when the yen falls this sharply and persistently, it becomes catastrophic for domestic Japanese businesses across every single sector. Now, over 20% of Japan's entire GDP comes directly from imports. And over 50% of international operating Japanese companies, they work in manufacturing. And what happens in manufacturing? A lot of imported inputs are needed. Now, these manufacturers, they source chemicals, raw materials, and components from the global supply chain, and they're priced in stronger foreign currencies like the dollar. And it's going to cost more yen every single month. In 2022, just one bankruptcy was directly attributed to yen weakness. But by 2026 this year, that number has really hit 45 confirmed cases with more than half of the year still remaining. The corporate bankruptcy count is climbing steeply and could balloon much higher as the years as the months go by.
The new energy crisis is going to add additional pressure on top of everything already hitting businesses. Now, this rising wave of corporate distress directly feeds declining consumer spending. Now, when companies they face margin collapse, they're going to cut workers, they're going to freeze wages, and they're going to reduce investment simultaneously. And all these three, they're going to feed back into weaker household consumption, and you can bet on that.
Japan desperately needs to reverse this collapse, and they need to do it fast. And they're trying everything right now, but nothing's actually working in any sustained meaningful way. They're trapped.
Now, the classic method is to protect a collapsing currency is to hike domestic interest rates aggressively to attract foreign capital. But for Japan right now, that approach risks really causing even more severe economic damage and cannot be easily executed. Now, hiking rates significantly would send completely the wrong signal to already deeply struggling companies. They are already very vulnerable at this point. Now, more corporate failures would follow almost immediately as a direct consequence of that.
Instead, Japan is relying on quantitative tightening. Now, the Bank of Japan is selling government bonds it previously purchased during the stimulus years, and they're doing it to withdraw yen liquidity from the financial system. Just take cash out of the equation. Now, from the balance sheet, it peaked in 2024, the BOJ has already shed 15.6% of their total holdings. Now, the logic is quite straightforward here. Reducing the supply of yen in circulation should put a natural floor under the currency collapse by making yen scarcer in global markets. But it's clearly not working fast enough or at a big enough scale to really make a difference. The yen keeps falling anyway.
Now the BOJ is also beginning to sell their holdings of domestic banking stocks, real estate investment trusts, and corporate equities into the market. And the goal once again is to withdraw yen liquidity from the broader system even more aggressively. Now it is a trickle right now, but that initial 1% of the portfolio could easily become 10% sold if the yen keeps plunging further.
Reports are also circulating that Japan is considering mobilizing their massive government pension investment fund to buy JGBs to support domestic yields and attract capital home. This is pure desperation. Now the yen briefly bounced on those reports before falling right back because the market immediately realized this approach is just too slow. It is too limited to save the currency in any near-term timeframe. Now only 25% of the funds can be allocated to domestic bonds under current rules anyway. And the earliest any formal change could be reviewed is 2030. But can the yen survive several more years of this carnage?
Now meanwhile Bessen keeps making the US position crystal clear. The United States will protect the dollar and maintain dollar dominance at whatever cost is necessary even to their allies. But a strong dollar structurally means a weaker yen. That unavoidable relationship cannot be escaped through any policy statement or diplomatic pressure.
"Dollar dominance is essential in everything President Trump is doing here. So everything we are doing is pushing the dollar the back. It's never left as the centerpiece for the global currency system, but we're reinforcing it."
Now, while the currency collapse is causing widespread damage, Japanese government bonds are crashing and pushing yields to levels not seen in over three decades. Now, the 10-year Japanese yield is moving steadily towards 3% and we are hitting back to 1996 territory. We are trapped in a dangerous situation where both the yen and what should be the domestic safe haven government bonds are plunging at the exact same time.
Now, the 2.3 trillion spending plan announced by the Prime Minister is making the bond market situation even more frightening for investors trying to find a safe haven. They got to account for this new future supply. Now, yes, this amount is spread across 14 years, but a massive portion will require new debt issuance directly into a very, very stressed bond market. And that additional supply pressure is really being priced into rising yields today. And considering Japan is facing pressure from China restricting rare earth exports and the US maintaining a strong dollar policy, 2.3 trillion may not be enough to really revive Japanese industries. They will have to spend more. And that uncertainty is causing investors to demand higher yield compensation to really hold JGBs right now.
Look at what Japanese producers are actually paying for the business inputs and this is the cause of another new panic because it really reveals the true underlying inflation pressure. Japanese producer prices are surging 7.1% year-over-year, the fastest pace since March 2023, but headline consumer CPI is running at just 1.7% officially. And that massive gap only exists because the Japanese government is heavily subsidizing consumer prices artificially to maintain social stability. Now, the moment those subsidies get reduced, consumer inflation, they're going to spike rapidly, and they're going to spike towards producer inflation levels quite fast.
Now, big Japanese companies that investors, including major life insurance, are really responding to rising domestic yields. They are shifting their investment strategies here. Now, Meiji Yasuda just announced they're doubling their planned purchases of ultra-long Japanese government bonds throughout 2026 as a direct policy change. Now, their reasoning is entirely rational. Domestic Japanese bonds are now yielding triple what they offered just 3 years ago with zero foreign currency risk attached.
Now, the pressure on US financial assets doesn't only come from Japan selling their existing treasury holdings directly. It also builds from giant Japanese investors like life insurance quietly shifting their enormous foreign bond allocations back home to domestic Japanese debt. Now, is this a legitimate and serious structural threat for Wall Street? Guys, it absolutely is. And the numbers demand it be taken quite seriously here.
Now, there's currently over 2 trillion in Japanese institutional money sitting in US treasuries and American equity markets. They are cornered. That's an enormous pool of capital that has been quietly supporting American asset prices for years. And Japan is doing everything within their power to attract debt capital home. And this is going to force a big reshuffling of the market dynamics in a very potentially devastating way.
Now, Tokyo is actively floating the idea of tax breaks specifically for JGB investors. They want to make domestic fixed income more attractive than other fund alternatives. They want retail savings money to exit fund assets like US Treasuries and flow back into buying yen denominated assets instead. Now, to buy those domestic bonds, what do you need? Domestic investors need to buy the yen first in a foreign exchange market. So, this is going to cause more organic yen demand from domestic repatriation directly. And it's going to help stabilize the collecting currency. It doesn't need the BOJ to actually hike rates or the government to sell US Treasuries here, at least for now.
Now, the latest US CPI data does provide some temporary relief to nervous markets. American consumer prices actually fell 0.4% in June. Now, many market participants are interpreting this as evidence that the immediate danger of the Fed rate hikes are gone. And if US inflation cools sustainably, Fed rate hike pressures eases. US yields might decline modestly, and that might help the struggling yen. But, here's the critical problem that persists regardless of one month of US inflation data. The yen is actually still collapsing. The Bank of Japan may still need to hike their own domestic interest rates going forward. The US CPI data is not enough.
And if that happens while the dollar simultaneously weakens, the yen carry trade begins to unwind at a massive and market moving scale. Now, investors who have borrowed cheaply in yen for years to buy higher yielding American assets will be suddenly forced to reverse those enormous positions. And that reversal means selling US stocks and bonds in big volumes, converting proceeds back into yen. This is not without any risks.
Now, Wall Street is very worried about exactly this scenario playing out at scale, and it's going to disrupt global markets. And it's not just American Treasury bonds at risk when the yen carry trade unwinds, it's American equity markets as well. Given how much Japanese money currently supports US stock valuations at these crazy levels. Now, all these valuations are moving dangerously towards the dot-com era extremes that precede the most devastating market crash in recent memory.
And strangely, markets still aren't treating the Iran de-escalation with enough seriousness. Now, the US just launched their third consecutive night of strikes, while Trump announced his naval blockade is re-imposed. And on top of the crazy 20% cargo toll proposal, which he just canceled, somehow Trump is now signaling even more military strikes are coming. The threat to global inflation is absolutely not over yet. So, global currencies everywhere, especially the yen, remains in genuine danger, and we need to stay on high alert here.
So, as always, let me know what you think in the comments below. Will Japan's crashing yen eventually force a currency defense that's going to backfire on US stocks and bonds? And as Japanese yields keep rising towards 3.5%, is that going to pull trillions in Japanese capital back home from American markets? Let me know what you think. Stay safe. Smash the like button and subscribe as we navigate through these crazy times.