Japan's Currency Crisis Is Now America's Problem

[00:01] seriousness, what's happening right now is absolutely insane. United States for a possible intervention of the Japanese yen after its value recently

[00:13] fell to its lowest level in 40 years. Well, basically, Japan currently holds so much their own money in US dollars that if they're forced to sell to prevent their own currency from collapsing, that could trigger a global

[00:25] reversal across the entire economy. And believe it or not, it's already started. So, even though I am rushing this video out without as many edits as possible, exactly what's going on, why the United States is trying to save Japan before

[00:40] and then what history tells us is most likely going to happen next because a lot of this is unprecedented. Although, before we start, as usual, if you appreciate the last-minute breaking news videos like this, all I ask is that you

[00:53] haven't done it already. That's all I ask. It helps out more than you can imagine, especially with my voice starting to go out from filming so much. here's a picture of my cat GG. So, thanks so much, and also big thank you

[01:07] but more on that later. All right, so in terms of where this begins, it all starts with the Japanese yen unwinding. Look, even though it sounds like a complicated term, it's really easy to understand when you break it down

[01:19] because on the surface, our global economies are extremely interconnected. Like, what happens in Korea affects the United States. The interest rates in one another. And in most cases, when a

[01:32] currency is weak, money flows out of that currency and into something safer, which in many cases tends to be the US dollar or in this case, US Treasuries. of the entire world. The more people that buy into this, the less interest we

[01:49] have to pay to entice people to hold on to it. And as a result, the better our economy does because there's no shortage of people who take our money. Just think of it like this. Every country has their own currency, their own interest rate,

[02:02] and their own inflation. But, it's all indexed to how many of these dollars they're able to purchase. This means there could be arbitrage opportunities where you borrow cheap in one currency, buy US dollars that are in a higher

[02:14] interest rate, and then you profit the difference. But, just like this could into this, it also works in reverse. And that is unfortunately what's starting to happen with the yen collapse. Here's the

[02:28] problem. For nearly 40 years, the value of the Japanese yen has been on a steady decline. In fact, their financial system is so bad with decades of deflation, an aging population, and weak demand that interest rates remain near historic lows

[02:42] just to incentivize spending, borrowing, and trade. And they could get away with that because up until recently, their inflation has been pretty much non-existent. Now, in most cases, this isn't that big of a deal, and global

[02:54] other out. But, recently something changed. Because the United States battled with record-high inflation from 2022 and 3, we were forced to raise interest rates at the fastest pace ever in history. And all of a sudden, the

[03:09] United States was paying out more money in interest than any other country risk-free. This presented a very unique opportunity where traders could borrow the yen at a really low interest rate, put it into the United States Treasury

[03:23] the difference. After all, why wouldn't you borrow the yen at 1% buy the US dollar at 5%, and then sit back and collect the spread? On top of that, historically, the value of the yen has also gone down relative to that of the

[03:38] US dollar, which meant that by the time you had to pay back the loan in yen, it requires fewer US dollars than you originally borrowed. Or basically, think of it like this. In really simple terms, you could theoretically borrow 1.6

[03:51] million yen at 1% interest, which would get you 10,000 US dollars. You could then take that $10,000 and buy a 12-month Treasury earning 4%. If everything stays the exact same after 12 months, you now have $10,400,

[04:05] which is equivalent to 1 million 650,000 yen. Pay back the original loan with 1% interest, and now you have roughly 400 US dollars with a profit, all while full faith of the US government. On top of that, just remember that the Japanese

[04:19] currency has been in a steady decline against the dollar, which means a lot of their money flows into the United States just to hold its value. However, all of this works really well until the one day it doesn't. And that's what recently

[04:33] happened, leading us to the unwind. On Friday, July 31st, Japan made a move that absolutely shocked the markets. They announced an emergency intervention to buy back their own currency with US dollars in an effort to prevent the

[04:47] yen's value from crashing. After all, they had the real concern that if their currency keeps falling, that could ignite even more selling. So, they stepped in, dumped the US dollar, and bought back their own currency in an

[04:59] attempt to stop it from collapsing. Now, even though this might sound like business, the answer is no, not even close. Because what most people forget is that Japan is the single largest foreign

[05:12] holder of US Treasuries on the planet. So, when they sell dollars to buy the yen, they flood the market with US Treasuries, which push interest rates higher. And that falls back on absolutely everybody in the form of

[05:25] higher mortgage rates, higher borrowing, and affecting the value of all of the stocks on our entire market. This is why when Japan sells 53 billion dollars, the United States has to act, too. Because if they don't act together, Japan could

[05:39] with them. So, in terms of what's happening right now, the impact this is realistically going to have moving forward, and then most importantly, what came for. Although, before we go into that, one thing I find very interesting

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[07:28] it a shot. Again, that link is down below in the description with the code get back to the video. All right, so in terms of what's happening right now, the impact we're about to see throughout the markets, and then most importantly, what

[07:42] you could do about it, we got to talk about interest rates. See, even though the Federal Reserve controls short-term borrowing between banks, they do not control long-term interest rates, like 10- to 30-year Treasuries, which are

[07:54] mostly dictated by supply and demand. And those are arguably the most important, because those affect pretty much everything, from mortgage rates, corporate borrowing, to even the value of every single stock in your portfolio.

[08:08] And now that other countries have begun selling their Treasuries to protect shot up and are now at their highest level since 2007. Again, to simplify this down even further, Treasury yields are really

[08:21] driven by supply and demand. So, when other countries buy our US Treasuries, yields go down because there's already plenty of demand, and the government doesn't need to offer as much to attract money to come in. But, when countries

[08:34] sell our Treasuries, prices fall and yields rise, because buyers have to be offered a higher return before they're willing to step in and absorb all that extra supply. That's why it's now said that the United States is going to be

[08:47] forced to intervene buy the yen with US dollars and hopefully stop them from selling off Treasuries, which drives our interest rates higher. Well, basically, just imagine it like this. My friend and I both own shares in the same stock, but

[09:00] suddenly he is desperate for cash. And if he unloads all the stock at once to raise capital, it's going to hurt the value of my shares, too. So, instead of allowing him to dump everything in the market, I raise some cash to buy his

[09:15] shares. Not so much to help him out, but to keep the value of my shares stable. going on here, except for the US economy. However, Japan's not the only one selling US Treasuries. Demand for our bonds has recently fallen to 10-year

[09:31] lows, purely because other countries are facing higher inflation due due rising oil costs, and our Treasuries are the ones that they hold on to and sell. This is exactly why our 10-year Treasury just crossed its 100-year moving average,

[09:45] which is a century-level event that is basically a first. So, in terms of what everyone watching, there is one more topic worth discussing, and that would be the aftermath. The reality is we have seen this exact same scenario play out

[09:58] seen this exact same scenario play out before. In fact, in 2024, Japan ran this exact same strategy. We saw two rounds of emergency intervention. Nearly 10 trillion yen was spent defending their currency. And it worked.

[10:10] For a few weeks. The yen ended up bouncing about 5% off its 34-year low. And then it proceeded to fall and hit a 38-year low just a few weeks later. Now, compare that to what just happened a few days ago. Japan spent a record $59

[10:25] billion. The yen rips from 163 up to almost 157. It's biggest weekly gain since February. And then by Friday afternoon, it had And then by Friday afternoon, it had fallen back down to 160. So, all of that

[10:38] work was for what? A few hours worth of relief? How? Well, it's the same reason why this didn't really fix anything in 2024. Any sort of intervention purely fixes the symptom and doesn't do anything to cure the underlying problem,

[10:53] holding their interest rates at 1% while the United States is holding at 3 and 1/2 to 3.75% with three members voting to go higher. So, until the gap closes, every dollar Japan spends is simply just kicking the

[11:06] can further down the line. This means there's really only two ways this ends. Either the gap closes because the Bank of Japan raises their interest rates and we cut hours, and then over time they balance out. Or the gap closes really

[11:20] fast. And in this case, fast is bad because if the currency unwinds all at downturn, similar to what happened in 2024. That's why the next checkpoint is going to be on September 16th when the

[11:33] Federal Reserve is expected to raise interest rates another 25 basis points, which would make the gap even worse, forcing Japan to intervene once again. this means for you, here is what you came for. Personally, I don't think

[11:48] coordination between the United States and Japan. This is now the second time that we have stepped in in 30 years, that we have stepped in in 30 years, once in 1998 and again in 2011. So, the

[12:00] them to intervene really shows that this is not a nothing burger, and it shows us that the United States is more intertwined than most of us expected. It's very much an us problem, too. However, in terms of how this plays out,

[12:14] I tend to believe we're probably going to see some short-term panic selling, a lot of volatility, and then it's just going to slowly grind back to normal, especially if the Bank of Japan finally hikes enough that the carry trade stops

[12:27] being worth it. Worst-case scenario is that investors get pushed to a point where it all unravels at once. But, given how Washington is closely believe that's probably not going to happen, and most likely this is going to

[12:40] blow over in a few weeks. But, then again, anything could happen. That's why I've been using this as an opportunity to buy the dip. If stocks drop even further, I tend to buy even more. And I know everyone hates me saying this, but

[12:53] I just stay the course. I keep buying in, and no matter what, I hit the like that already. So, with that said, thank you so much for watching, and as always, if you want early access to videos like this, as well as a bonus video every

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[13:18] channel member. So, I do my best to get back to every single comment. Hope you enjoy it. Thank you so much, and until next time.