Yen's Free Fall Triggers Global Financial Crisis Fears

The Japanese yen's recent decline to a 40-year low against the US dollar has raised concerns about a potential global financial crisis. The fear is that a further fall in the currency's value will trigger a confidence crisis, leading to inflation and negatively impacting financial markets worldwide.

Recent joint intervention by the US and Japan has temporarily stabilized the yen, but experts believe this relief will be short-lived due to adverse fundamentals in Japan. These include a low short-term interest rate of 1% compared to the US's 3.5%, a high national debt twice that of the US, rising energy prices, and an aging population.

US Treasury Secretary Scott Bessent is concerned that Japan may start liquidating its $1.1 trillion portfolio of US Treasury bonds and bills, putting pressure on interest rates. He suggests using facilities created in 2020 to help the yen borrow dollars with Treasury holdings as collateral, avoiding sales.