Transcription
The time bomb that could cause the stock market to collapse might not be AI, but rather the liquidity of the Japanese Yen or what's known as "Yen Carry Trade." It's crucial not to be ignorant of this matter, as money is a significant issue. Hello, I'm Ken from Money Buffalo. Before we continue, please like and share Money Buffalo. Today, I want to discuss a topic that isn't frequently talked about, but I believe it's important. If you're an investor wondering if we're in a bubble or if an economic crisis is imminent, this is something you should follow closely. It's about the Japanese Yen and Japan's bond yields. While many might be focused on whether AI is creating a bubble, looking at financial statements, capital expenditures, or whether investment money is still flowing, I want to point out another significant bubble that everyone is currently interested in, though it's not widely discussed in Thai media. That topic is the Japanese Yen. Currently, the Japanese Yen is weakening more severely than at any point in history, reaching an all-time high of 162 Yen per 1 USD. This figure indicates a significant outflow of money from Japan and a continuous, sharp depreciation of the Yen.
The second matter to watch closely is Japan's bond yields. As of the latest data from Friday's market close, the 10-year bond yield touched 2.9%, before slightly pulling back. If you consider that a yield this high is a level not seen in 30 years, it represents a major global problem. Historically, before the Russia-Ukraine war in 2022, Japan experienced very low inflation and a sluggish economy. Consequently, interest rates were extremely low, even negative, for a prolonged period, from before 2016 through 2020-2021. Imagine Japan, a country with such low interest rates. The reason for these low rates was to stimulate the economy. Low interest rates encourage borrowing for investment and other activities, driving economic circulation. However, another consequence was that foreign investors, seeing these low Japanese interest rates, began borrowing money. For instance, borrowing at 1-2% interest for loans, while government bond yields in countries like the US were as high as 4.5%. Or, borrowing to invest in dividend stocks, particularly defensive stocks, could yield 5-8%. Do you see the difference in returns here? Borrowing at 1-2% and lending it out at 4.5% for US interest rates, or even 6-8% for dividend stocks if you're willing to take a little risk, was essentially "free money." The Yen was also slightly expensive, but it still offered a profit. After acquiring these assets, they could be used as collateral to borrow even more. This led to a "spiral" phenomenon globally, known as the Yen Carry Trade. This involves borrowing low-interest Yen from Japan and investing in financial assets worldwide. This has been happening for the past decade, especially since 2016 when rates were extremely low, even negative, and loan interest rates were around 1-2%. For the past 10 years, the world has become accustomed to borrowing Yen for investment, seeking returns, and leveraging.
Now, as yields begin to rise and the Yen weakens, this situation is exacerbated. The weakening Yen further pressures the Bank of Japan (BOJ) to consider raising interest rates soon. Moreover, rising yields are not confined to Japan; they are increasing globally. The previously low cost of borrowing is disappearing. At this point, many might be confused about what's happening and why Japan has such low interest rates. Let me summarize the history. Before the 1980s, leading up to the Tom Yum Kung crisis in Thailand, Japan experienced massive growth with soaring credit, land prices, and stock prices. However, this rapid expansion led to controls. The BOJ raised interest rates and tightened credit. This caused the bubble to burst, leading to stock market declines and a surge in non-performing loans for both companies and banks. They had to reduce debt. This is why, after the 1980s and 1990s, Japan's economy stagnated. Coupled with an aging population and a shrinking workforce, the BOJ continuously lowered interest rates, eventually reaching negative territory, yet it failed to stimulate the Japanese economy.
However, a significant turning point that is causing the Yen Carry Trade to lose its magic, and is now a major factor pressuring the global economy, occurred in late 2022. The Russia-Ukraine war caused shortages of natural gas, oil, and other commodities. Supply chain disruptions led to a resurgence of inflation worldwide. Around 3-4 years ago, we saw trends of rising interest rates, inflation, and a shift in fashion. If Japan had not raised interest rates, a problem would have arisen. As other countries raised their rates, Japan remained stagnant. Imagine depositing money in Japan earning 0.1%, while other countries offer 5%. No one would want to hold Yen; people would sell Yen and move their money abroad. The Yen would weaken further, making imports more expensive, exacerbating inflation. Therefore, since 2022, we've seen the BOJ implement various policies, including keeping interest rates negative but using Yield Curve Control (YCC) to manage bond yields. Ultimately, this proved unsustainable, like "pouring chili paste into rice soup" – a futile effort. The global market has its own mechanisms, and intervention requires significant funds and is not sustainable long-term. In 2024, about two years ago, the BOJ abolished negative interest rates, moving them into positive territory, which was another challenge. They also abolished YCC, allowing interest rates to be determined by market forces. This shift also led Japanese companies and individuals to re-evaluate their Yen holdings. For the past 30 years of economic stagnation, Japan held a peculiar belief, but it was indeed the reality for the country: Japanese companies considered price increases a life-or-death matter, as it meant passing costs onto consumers. They would apologize profusely for having to raise prices, even by a small amount like 50 Yen. This was compounded by rising global costs over 30 years, while Japan remained stagnant. This led workers to feel that their earnings weren't increasing, hindering development. Workers began demanding higher wages, and with the return of inflation, it became clear that prices needed to adjust. If you visit Japan now, you'll notice that prices have increased. A bowl of ramen that used to cost 800-1,000 Yen now costs 1,500-2,000 Yen. We are seeing price adjustments according to market mechanisms. In my opinion, this should have happened much earlier, and resisting market forces for so long was unnecessary.
This situation is causing the magic of the Yen Carry Trade to diminish. The weakening Yen is pressuring the BOJ to accelerate interest rate hikes. If interest rates rise further, Japanese bond yields will continue to climb. If you look at Japanese bond yields now, you'll see a strong upward trend, like a super bullish stock. They are likely to continue rising as inflation persists. As yields increase, the cost of borrowing cheaply from Japan, which fueled the Yen Carry Trade, will become less profitable. The profit margins are already thin, and if they become negative, we will see another phenomenon: a liquidity crunch. Those who borrowed money will start selling all their assets. When money flows out, it doesn't just leave one asset class; it affects gold, stocks in the US and Europe, and even the Thai stock market might be impacted by this outflow. Cryptocurrencies and Bitcoin will likely be affected as well. When money leaves, it's typically for investment purposes. If this trend continues and the profit margins become negative or too thin to justify the risk, people will start realizing profits, cashing out, and withdrawing liquidity.
For myself, I don't yet believe the Yen Carry Trade has completely lost its magic. However, I feel that the process is no longer as smooth as it used to be, like a "field of lavender." There was a significant margin of safety. It might not be an immediate crisis, but if the BOJ sees further inflation and continued Yen weakness, they might raise interest rates sooner. A rate hike would directly impact bond yields, accelerating the mechanisms I've described. Alternatively, if we suddenly see the Yen strengthen significantly without any clear reason, we need to investigate the source of this strength. If it's due to debt repayment or foreign capital inflows, but the stock market and other assets aren't rising, it could be a red flag. Another scenario is if, without any news like wars or economic issues, and with good corporate earnings, all assets suddenly decline without apparent reason, triggering stop-losses and circuit breakers. This would indicate a deleveraging event. Therefore, it's important to monitor this situation, though it might not be my top priority, perhaps ranking second or third. The Japanese authorities are aware of the problem and are taking action. I believe it won't be long before we see currency intervention, as the Yen is weakening too rapidly, which can also be detrimental to Japanese businesses.
Unlike AI, which is not a bubble, generating revenue, profits, and seeing increasing adoption, creating real efficiency, the current global liquidity situation is concerning. The way liquidity can be manipulated is frightening, with assets being used as collateral. Japan and the Yen Carry Trade represent a significant source of global liquidity. If this liquidity is withdrawn, it doesn't matter what the underlying value of an asset is in the short term. When assets are sold off, if you've been in the market for about five years, you've likely witnessed at least one or two instances of indiscriminate selling. For example, in February and March, there were liquidations of leveraged positions, forcing stop-losses. Before that, during the Russia-Ukraine conflict, or if you're in the crypto market, you've seen how prices can plummet without regard for fundamentals, with sharp drops followed by a search for a new bottom. Those with cash could profit significantly during these times. Therefore, the Yen Carry Trade is fundamentally about liquidity. Regardless of how strong the fundamentals are, if liquidity is drained and forced selling occurs, prices can fall sharply. This is another factor to consider. When we debate whether a bubble will burst or not, and whether prices will fall, it's certain that when a bubble bursts, we need to understand the cause: is it due to poor earnings or a liquidity crunch? The outcome is the same: prices fall.
What we can learn from Japan is that during the economic crisis of the 1980s, when everything seemed prosperous with rising land and stock prices, no one predicted that Japan would face 30 years of deflation. The lesson here is that when beliefs and expectations far outstrip fundamentals, bubbles are likely to inflate and eventually burst. The largest and most frightening bubble is when everyone thinks the same way, believing that everything will grow indefinitely. That, I believe, is when a bubble is at its peak and most dangerous. Finally, if you enjoy this kind of content, don't forget to like and share.