Bravos Research breaks down why the massive US-Japan intervention to strengthen the yen isn't the friendly gesture it looks like, and why history says a strong yen has preceded three major market crashes.
Key Points
Key Highlights:
- Japan spent $60 billion in a single day and the US added another $10 billion, the largest intervention in Japanese history, immediately moving the yen dramatically higher
- A strengthening yen preceded the 1987 crash, the dot com crash, and the 2008 financial crisis, each time acting as a warning sign before stocks fell 30% or more
- The yen carry trade has built an estimated $14 trillion in leverage, borrowing cheap yen to fund US stocks and treasuries, meaning a stronger yen forces investors to sell US assets to repay their loans
- Japan is also the largest foreign holder of US Treasuries, and selling them to defend the yen is already pushing the 30 year yield above 5% for the first time since 2007
Takeaway This intervention isn't kindness, it's necessity, the US needs Japan's bond buying to continue. The current move is still mild, but if the Bank of Japan raises rates toward 3%, a much larger unwind becomes likely, and history says that kind of yen strength rarely ends quietly.
