US Yen Intervention Sparks Global Economic Worries

The US Treasury Secretary, Scott Bessent, made headlines last week when he was seen carrying a 'to-do' list that included buying Japanese Yen ($JPY) between $5-10 billion. This move was not just a signal of intent, but an actual intervention by the US to prop up the yen after it had fallen to a 40-year low. Japan and the US jointly announced their intervention, with Bessent framing it as an act of partnership. However, this move has raised eyebrows in Europe, particularly since the US used euros instead of dollars to boost the yen.

The use of euros was seen as an unprecedented breach of longstanding conventions on cooperation between Western monetary authorities. The European Central Bank (ECB) was blindsided by the decision and only informed of it after the fact. This lack of coordination has sparked concerns about the independence of central banks, particularly in light of recent developments at the US Federal Reserve.

The Fed's new communications strategy, announced by Chairman Kevin Warsh, has been criticized for lacking transparency on monetary policy direction. Additionally, Warsh's appointment was seen as a response to Trump's pressure on his predecessor Jerome Powell, who faced threats of being fired if he didn't cut interest rates quickly enough.

The yen intervention and the subsequent use of euros have also raised questions about the global economic implications. A weak yen can make Japan ultra-competitive against the US, but it also poses risks to the US Treasury bond market. The largest holder of US Treasury bonds is Japan, and if those bonds are sold off to support the currency, it could lead to higher long-term interest rates in the US.

Asia is already feeling the impact of these developments, particularly South Korea, which has seen its stock market plummet by 40% in just 27 days. This volatility has made South Korea a highly risky investment destination. Indonesia also faces challenges due to an overly ambitious government spending program.