Yen Plunge Triggers Global Financial Crisis Fears

The Japanese yen recently hit a 40-year low against the US dollar, sparking concerns that it could trigger a global financial crisis. The fear is that further depreciation of the yen will lead to a confidence crisis, causing inflation and negatively impacting financial markets worldwide.

Recently, the US and Japan undertook a joint intervention in currency markets to prop up the yen by buying dollars with yen, which has had some success. However, experts believe this relief will be short-lived due to adverse fundamentals in Japan, including a low short-term interest rate of 1%, a high national debt, rising energy prices, and a declining population.

US Treasury Secretary Scott Bessent is worried that Japan may start liquidating its $1.1 trillion portfolio of US Treasury bonds and bills to prop up the yen, which would put pressure on interest rates in the US. To mitigate this, Bessent suggests using a facility created in 2020 to help the yen or employing a Depression-era facility called the Exchange Stabilization Fund.

The article suggests that Japan should boost its short-term interest rate and stop reintroducing yen into its economy after buying dollars with them, which would simply offset the supply of yen. Instead, Japan could reduce the supply of yen to keep the exchange rate stable between 150-155 yen per dollar.