PETER BRUCE | Yen’s having a crisis — but Trump’s on the case

In case you don’t already have enough to worry about, I have something for you — a smouldering crisis for the Japanese yen.

I’m no expert, but Japan’s currency is at a 40-year low against the US dollar and is now the subject of an intense rescue effort. Japan is the world’s fourth-biggest economy. After the US (GDP $32.4-trillion, equivalent to about R524-trillion), China ($21-trillion) and Germany ($5.5-trillion), it comes in at ($4.4-trillion). But it has by far the biggest load of public (government) debt at 204% of GDP. The US is next at just 123% of GDP.

These are all immense economies, and South Africa does good business with all of them. We are nominally the world’s 35th biggest economy with our $495bn GDP, stuck between Vietnam and Iran. Our central government debt is around 76% of GDP.

What is happening in Japan matters here. When property and stock markets crashed in Japan in the early 1990s, the government thought it could revive the economy by cutting interest rates to zero or even below zero. It’s an argument we frequently hear from the Left in this country, but for the past 20 years, one way or another, the Japanese have been trying, and failing, to escape this supposed nirvana.

Massive stimulus packages — new roads, high-speed trains and other infrastructure — have had little impact on growth, however, and because of this, the money raised to fund these projects has sharply spiked the debt ratio. Worse, Japan’s ageing population means its tax base isn’t growing.

Investors, however, have had a field day. Because Japanese interest rates are so low, they’ve been able to borrow yen cheaply and buy expensive US assets with the money. When you sell the shares you bought with cheap yen, you pocket the dollars you’ve made and give back practically the same amount of yen you borrowed. What’s not to like?

They call it the “carry trade”, and it partly explains why the US stock markets have done so well since Donald Trump began reconvulsing the world with trade tariffs and foreign wars after returning to office last year. Though it’s a sad commentary on the yen, the Americans like the carry trade, and you can be sure South African institutions have indulged in it too.

All of which might explain why Scott Bessent, Trump’s treasury secretary, jumped to attention last week when he saw the Japanese selling large chunks of their US dollar reserves. Did I forget to tell you the biggest foreign holder of US debt, now passing $40-trillion under Trump, is Japan, with about 4% of that debt in the form of US treasury bills? They began selling them last week to try to strengthen the yen, which had fallen to a 40-year low against the dollar, making imports, especially of oil, more expensive.

What Bessent had seen was a Japanese problem now about to become a US one

Bessent pressured the US Federal Reserve to help the Japanese shore up their currency because there was a risk that a fire sale of treasury bills would damage the dollar and, worse, force down the price of all treasury bills which would, at the same time, raise the effective interest rate on them, making them more expensive to redeem.

What Bessent had seen was a Japanese problem now about to become a US one. The Americans have to roll over, or refresh, about a third of their total debt this year. If the yields on T-bills rise because the Japanese are trying to sell them, then the issuing of new treasuries becomes significantly more expensive for the US.

Trump of course saw it as an act of American munificence. “Japan has been good to us,” he said when asked about the joint defence of the yen. “Apart from Pearl Harbor.”

Thus far, the $100bn spent supporting the yen has had little effect. But it is the world’s third-largest trading currency, and if it were to collapse it would trigger a massive global convulsion. A yen crisis would cripple a major market for South African commodities, and capital would flee emerging markets like ours. The carry trade, estimated to be worth between $500bn and $1-trillion, would be obliterated if the Japanese were forced to sharply raise interest rates. Last week the yields (the interest rate the US has to pay holders) on treasury bills rose to their highest this year.

A Japanese currency crisis is almost unimaginable, but a cheap yen increases the cost of imports, and puts political pressure on the government. Having signalled their intention to defend the yen, the US and Japan are challenging the currency markets to bet against them.

Bessent worked for George Soros when Soros’s bets blew the British pound out of the European exchange rate mechanism in 1992. Sterling sank like a stone, and the Bank of England triggered a recession by raising rates to 15% — so he knows what happens if he loses.