Japan Intervenes in Currency Markets Amid Economic Challenges

Japan's recent intervention in currency markets has provided valuable lessons for investors. Two Japanese savers who made different choices a decade ago illustrate this point. One left their money in yen, while the other bought gold and forgot about it.

Ten years later, the gold holdings have increased by 375%, while the yen has fallen by 205%. The extra gains from holding gold came not from its price appreciation but from the decline of the yen's value. This highlights the importance of understanding currency fluctuations in investments.

Recently, Japan and the US coordinated to buy yen on the open market, a move last seen in 1998. Washington's intervention aims to prop up the yen, which has been under pressure due to Tokyo's economic challenges. The US is trying to prevent Japan from selling its massive holdings of US Treasury debt, which could have significant implications for global markets.

According to Torsten Slok at Apollo, the yen no longer trades on interest rates as it once did. Investors can no longer borrow cheaply in yen and buy higher-yielding assets elsewhere, making the traditional carry trade unworkable.