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Japan Yen Passed Scary Benchmark Against the Dollar

Japan Yen Passed Scary Benchmark Against the Dollar

October 25, 2022849 view(s)

 For the first time since 1990, the U.S. Dollar reached 150.09 Japanese Yen briefly in overnight trading. Immediately, the ratio pulled back to 149.63. Investors speculate that the Ministry of Finance and Bank of Japan intervened.

Japan Yen Passed Scary Benchmark Against the Dollar

Many investors believe the BOJ has intervened four times since September 21, but the evidence is circumstantial. The Japanese Yen has consistently declined since mid-March, when the Fed began raising interest rates. In 2022, the Yen has lost 28.03% of its purchasing power against the Dollar. The Yen has performed worse than the incredibly bearish S&P500 this year.

Why is Japan Struggling

Japan is not a fledgling war-torn developing third-world economy under an African warlord where currency crises are common. Japan is the third-largest global economy and the second-largest economy in the G7. Japan represents nearly $5 trillion of the 2021 global GDP. The problems Japan is having do not seem to fit, but the problem is a serious global threat.

Japan has a debt problem. For decades, Japan has printed so much money that it cannot afford the interest. In 2013, Japan began its policy of yield curve control. Yield curve control is buying bonds at any price or quantity to control the interest rate. Japan adopted yield curve control to keep its economy solvent against a strong Dollar. The goal of the BOJ (Bank of Japan) is to keep interest rates between 0-0.25%. 

The reality of pandemic politics and printing has been historic global inflation. The pandemic led to unprecedented printing around the world. The Federal Reserve responded by raising interest rates to stifle demand, which has strained Japan's ability to control its interest rates. During low global interest rates, Japan’s yield curve control was somewhat effective in stabilizing prices and keeping employment numbers healthy. 

The Fed raising interest rates created the worst possible situation for Japan. Japanese bond investors can sell their bonds for profit and put the proceeds into U.S. bonds for approximately a 17x return from what the Japanese bond pays. It’s not just U.S. bonds paying significantly more than Japan. Japan is the only top ten economy that has not raised its rates this year. Japan must grit its teeth, print the money, and buy the bonds, whatever the price or consequence.

Japan cannot back off its policy. If Japan raises rates, it will be worse than if they don’t. Since people did not expect interest rates to rise, 73.9% of all Japanese mortgages are adjustable rates. Leading up to the 2008 U.S. housing crisis, only about 35% of U.S. mortgages were adjustable. Japan is only beginning to recover from the pandemic. Inflation is high, and the Yen is struggling. A massive reset of mortgages would create an epic housing crisis. 

Japan’s current debt is 230% of its annual GDP. Japan is home to the world's 6th, 12th, and 13th largest banks. Japan raising interest rates would bankrupt the government and create a housing/banking crisis which could take down global markets. To put the gravity of the potential collapse in perspective, adjusted for inflation, Lehman Brothers would be the 42nd largest bank in the world today. Lehman Brothers collapsing would feel like a warm-up stretch in a Silver Sneakers class compared to what the market will do if one of the Japanese banks goes down. The collapse would feel like performing a triathlon and immediately competing in the CrossFit games. Most of the market won’t make it. All three Japanese banks are already overleveraged and at least 16%  more likely to default the troubled Swiss bank, Credit Suisse. Japan and global markets are in danger if it raises rates or doesn’t, and so is every American portfolio.

What Does It Mean?

Japan Yen Passed Scary Benchmark Against the Dollar

Japan is the most prominent creditor nation. Since Japan has such low-interest rates, it is a very attractive place to get loans. The International Monetary Fund estimates that Japan has $9.96 trillion in assets overseas with $5.7 trillion of that number in debt instruments. The IMF suspects a rise in Japanese rates would expose Japan to the real risk of about $7.3 trillion in cash repatriating to Japan. Then all bets are off to the solvency of the entire global economy. If even a fraction of that repatriates to Japan, the Forex markets would go crazy, and Japan would have breathtaking inflation. Deutsche Bank analysts have stated it would affect the Forex and derivatives markets for weeks. The Forex market is the largest and most liquid in the world. It is worth around $2.4 quadrillion. (A quadrillion is a million billion. 1x ) Every day, around $6.6 trillion trades on the Forex.

Chaos in the Forex markets is terrible when it happens for an hour, but weeks can feel like an eternity and destroy years of gains across the globe. It is not an overstatement that Japan's debt problem can send the global economy into a multi-year depression. 

Will Precious Metals Save the Day?

Precious metals are not a panacea for every economic problem. However, there are a few things precious metals do well when the economy breaks. First, precious metals are a safe asset and a good value store. Precious metals probably won't make you rich, but they do a great job of ensuring you don't get poor. Second, precious metals have intrinsic value. Suppose things get so bad that currencies collapse. In that case, everyone will need value items to buy the new currency or barter for goods and services. For the last 5,000 years, precious metals have been the primary tool used for that situation. Third, precious metals are good for hiding wealth outside the purview of prying government eyes looking for sources of revenue. Everyone should pay their fair share, but history is rife with examples of governments wanting some people to pay a "fairer" share than others, especially during emergencies. When the taxman wants to look at your bank account, precious metals are an equalizer. The taxman can only tax what he can find. Fourth, precious metals are a great way to save money. When the value is in metals, instead of Dollars, it requires more effort to spend than clicking transfer between accounts. For many people trying to control spending, precious metals are a built-in safety net for their goals.

In healthy markets, most investors keep about 5-20% of their portfolio in precious metals. However, is there any typical or healthy about the market these days? There isn't a portfolio playbook for where we are. My best recommendation is to find safety. Protection is more critical than growth right now. Do you agree? If so, how much of your portfolio do you want to protect? Let's talk about it.

Call the U.S. Gold Bureau today to learn how precious metals can protect you. 

(800) 775-3504

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About the Author: Ryan Watkins


Ryan is proud to be an Army veteran. After honorably serving his country, he studied finance, marketing, and kinesiology and graduated Cum Laude. Sharing a professional, practical, well-rounded investment perspective is his primary objective. Ryan invests in many different assets but admits he likes tangible assets best. His sincere passion is educating people and helping them make the most informed choices.

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Ryan Watkins, Op-Ed ContributorbyRyan Watkins, Op-Ed Contributor
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