Yen Intervention Exposes Misconceptions About Global Financial System

The recent yen intervention has sparked a flurry of speculation about its implications for the global financial system. However, most of this narrative is based on misconceptions and misunderstandings. The intervention was not a joint effort by the US and Japan to manipulate currency markets, but rather a unilateral action by Tokyo to prop up its own currency.

The US contribution to the intervention was small, around $5-10 billion, while Japan spent roughly ¥8.45 trillion (around $53-59 billion) in one session, with the full week closer to $75 billion. The Treasury bought euros, not dollars, and did not touch the Treasury market.

The narrative that this is a sign of Japan's insolvency or impending default is also unfounded. While it is true that Japan has a high debt-to-GDP ratio and its currency is at a 40-year low, this does not necessarily mean that it will default on its debts. Japan prints its own currency, owes most of its debt to its citizens, runs a current-account surplus, and holds the largest net creditor position in the world.

The Fed's role in the intervention has also been exaggerated. The New York Fed served as the Treasury's operating desk, which is its ordinary role whenever the US engages in currency markets. The FIMA facility used to provide liquidity was not a new measure, but rather an expansion of a long-standing tool aimed at preventing a fire sale of Treasuries.

Finally, the narrative that this is a sign that fiat money is dying and gold is the only safe-haven asset is also overblown. While it is true that gold has historically performed well in times of economic stress, pricing assets in gold does not necessarily provide a more accurate picture of their value.