I live in Japan and this has happened so quickly it's been stunning. While not much has changed domestically so far, I am hearing and starting to see foreign people question whether they could work and live here long term if it stays like this. It's fine if you are earning USD and visiting Japan (wow there are so many tourists this year) but if your salary is priced in JPY and you plan to retire in the US, it's basically impossible right now.
My understanding is that most of the pain in JPY is being caused by carry trades by the financial sector. Because they are very common currencies and most traders right now believe that both the US and JP are stuck with a wide spread in interest rates... you can borrow JPY and invest in USD and make 4-5% on it.
As an aside, I also wish we didn't use the terms strong/weak for currencies because it carries a good/bad connotation. It's just high/low and there are pros/cons to each.
Japanese salaries, however, are by and large not going up (certainly not at the same rate), which is obviously causing even more pain and further dividing the haves from the have-nots.
This is a solid short-term explanation, but there's always an investment sector focused on the long term, and those guys are looking at the demographic disaster Japan will inevitably experience.
Carry trades and yield arbitrage explain a lot, but the Hikikomori are wrecking the Yen over the long term.
I have JPY, can I make money on it, or do I need to borrow it? Is the idea here to buy USD, wait for the price to go up, and then sell it back in JPY?
After you pay back the 2% interest to the original lender, you're left with 4% as profit.
This usually happens when one government pushes banks for lower interest rates (to stimulate the domestic economy).
It creates a large volume of trades buying USD with JPY, and by doing so causes the JPY currency to become less valuable relative to USD.
They don't mind the currency going low as it helps exports but going too low, too fast is a problem. Increasing interest rates to narrow the spread will affect the economy. So they are walking a very tight line here between JPY/USD spreads and domestic economy/interest rates. All global economies are to some extent but since JPY is trusted and has had low interest rates for decades, it's popular within the finance industry for this kind of trade.
Borrowing yen now to buy dollars is sort of like shorting a stock when the price already dropped. The interest rate difference makes it a cheaper bet, but it’s still a bet and could go bad if the yen strengthens.
Within a few years, those borrowers (whose income was naturally denominated in Australian dollars) got a very painful lesson in that risk, when the exchange rate between the Australian dollar and the Swiss franc moved significantly, putting them very much underwater on those loans.
(This became known as the "Swiss loans affair", with allegations that the banks in question had in many cases not adequately informed the borrowers of the risk).
https://www.smbctb.co.jp/en/timedeposit2404/?icid=24_en_top_...
You wouldn't think that printing money leads to a stronger currency, but perhaps this is a delayed effect after you stop printing.
Goods and services that are traded internationally are priced in USD. Other currencies do not end up directly representing goods and services; they are relative to the USD. Therefore, the demand for dollars is always very high, and it will be as long as the dollar keeps the reserve currency status.
Ultimately they want to exchange for the currencies they need to pay bills, wages, and taxes in.
"Reserve" currency has little to do with it - if anything it's the high volume of trade with USA that makes it worthwhile to keep reserves of USD, because the high volume of US trade means you get many chances to exchange USD for whatever currency you actually need.
That's the key IMO. USA has a long history of being a safe country for investment. It has uninterrupted democracy and rule of law since it was founded. It hasn't had a war on it's territory since the Civil War. It has a lot of free land and natural resources.
It's just good fundamentals first - and then of course you need not to fuck up massively to ruin that, which USA has not.
American Civil War (April 12, 1861 – May 26, 1865)
Black Hawk's War (1865–72)
Red Cloud's War (1866–68)
Comanche campaign (1867–75)
Modoc War (1872–73)
Red River War (1874–75)
Great Sioux War of 1876 (1876–77)
.... 10 more ....
Ghost Dance War (1890–91)
Crazy Snake Rebellion (1909)
New Mexico Navajo War (1913)
Bluff War (1914–15)
Colorado Paiute War (1915)
Posey War (1923)
In any case the post-pandemic interest rate hikes are recent. There seems to be a much longer term (decades long) dollar strengthening pattern that is not really touched upon in the article.
It says a lot more about the preferences of Americans that it does about any of the other countries.
Money isn't a commodity, and that's why the Monetarist view is so off.
Inflation is never caused by a decline in the value of money, but it can cause a decline in the value of money, just not in every conditions (and with central banks raising interest rates when there's inflation, in practice it has the opposite effect)
Main drivers of exchange rates are international trade of all kinds and its requirement to use specific currencies in specific places (you can accept payment in JPY when your company is in USA, but you need to pay your taxes in USD!), and speculation.
Essentially for FOREX, the exchange rate is essentially determined by entities needing specific currency for something - for example to pay for purchases or services, pay wages, taxes, etc. - when you have money in different currency.
The rest is plain market - you put an offer like "I will buy 100k USD in exchange for 11m JPY", but others were willing to offer more, and thus the averaged (I know, simplification) exchange rate goes up.
But you might be able to catch a trade at lower price because someone might need JPY right now (or other forex-compatible asset you have) quicker than it could sell USD at higher prices, etc.
You can of course also purely speculate on the prices and make money from "nothing", pure financialization, pure capitalism, close to zero value being produced.
Printing money can be used to artificially change the exchange rate by offering "cheap" money for other currencies. The reason why you might want to do is simple - your currency being "weaker" tends to benefit exports (at the same time exports drive currency "stronger"), while stronger currency benefits imports (but imports drive currency "weaker")
Europe is like a kid copying the US homework, trying to make the equations work.
Well, compared to most other countries I know about, US rates work a little differently.
Homeowner mortgages are (AFAICT) almost all fixed for the full term of the loan. So a rate hike doesn't immediately take money out of the pockets of a large proportion of the population. It may slow new home finance agreements, and affect a lot of other credit agreements, including the ability of business to borrow, but it doesn't kick a huge number of people right in the domicile.
Whereas here in Aus and in the UK (two places I've held mortgages) fixed terms are only available on a relatively short basis (1-5 years) and people won't take them out at all if they feel the rates are already a little elevated (like now), as there are penalties for refinancing in the fixed period. So interest rate rises directly impact people's pockets and threaten their housing stability.
So over here mortgage holders really do hate rate rises and feel personally aggrieved when the central bank raises them.
This situation conceivably makes tackling inflation easier - public spending plummets when rates go up - but it is massively unpopular.
You can be sure that the day the USD isn't viewed as the global currency, all this printing will come bite back hard and probably cause a collapse.
Maybe China will have strong consumers in the future but then it'll have to ensure it can compete with US wages which erodes its competitiveness.
House always wins.
They based their economy way too much on export and real estate to grow at a normal rate. The worst covid lock down in the world certainly didn't help.
The country is lagging behind because of their contradictions.
They’re still human so they can be swayed by Presidents and obviously have their own political leanings. In general the ability to not listen to politics allows them to make choices that are inconvenient for an election cycle but good for the US economy.
https://www.pbs.org/newshour/show/does-the-president-have-le...
Also, removing Powell doesn't let any president put someone in who will set whatever rate they want. It must be a member of the Board, of which two are his nominees from his term. They also don't have to listen to him.
When it comes to setting rates, Powell is chairman, not supreme leader. The FOMC sets rates and that is a group of twelve.
https://www.investopedia.com/terms/f/fomc.asp
Given Trump wouldn't see sworn in until 2025 and would have the usual problems of any new President rather than the benefit of a second term, and as Powell was confirmed in 2022, under current case law, Trump at best simply gets to nominate a new chair a number of months before he'd do so in 2026.
Powell's single 14 year term on Fed board ends in 2028 so there will be a new Chair no matter what after that.
While from a Political standpoint, I don't like what he may do, I am ok with how this is setup. This is not as easy as simply replacing his cabinet members and that is a good thing.
If the ECB decides to lower interest rates before the US Fed does, then even more capital will flow in the US because why would you accept a lower interest rate when you can get a better one in the US in the same asset class.
That in turn will keep making the USD stronger than the euro.
When you compare dividends+buybacks from UK/French/German companies to US companies, expected returns over 10years, and stock price, excluding "growth" companies (Tesla, netflix, Uber), you can see a 10 to 20% premium. Is it stability priced in?
_I_ also think it shouldn't matter in non-tech, non-growth companies. If Nestlé or lactalis crash (lactalis might be a bad example, i don't think they have public investors), i doubt Cargill or Heins will take the hit better. If you're a long-term investor (and let's be honest, most of us are) and mostly count on dividends to "make" money, you should be better off investing in old brand without paying the US premium.
> Europe will show its glory again; no matter what.
Unless Europe finds a way to monetise retired people, lack of natural resources and free land and the grip of bureaucracy and old money I find it highly unlikely
On that topic; I've been watching the US Treasury's "Major Foreign Holders of Treasury Securities" [0] with some interest. There are some very big strategic changes afoot; China doesn't seem particularly willing to take US debt any more. They'd going to be 3rd largest holder soon and now hold less than 10% of the outstanding US treasury debt.
[0] https://ticdata.treasury.gov/resource-center/data-chart-cent...
"...Americans can afford to buy more foreign goods and services (including cheaper vacations).
So even if it strengthens 10% against the Yen then that just means that someone in Japan will be feeling really poor, but a US dollar still won't be buying as much as a US dollar from a few years ago would have once inflation in both currencies gets factored in. The purchasing power of all the currencies is dropping, it is just the Yen is dropping faster. These are policy choices by the respective governments (although they often don't feel like choices).
I'm sure there are a bunch of currency traders making good money and it is certainly possible that US dollars buy more in some places. But it is more likely that a US dollar in 2024 buys less than in 2023 everywhere, because the US government has an official policy of making it so. Over 5 year timelines it is all but a guarantee that they will succeed in their policy. There isn't a global trend where the US dollar buys more than it did some time in the past; it is strengthening against other currencies, not rising in value.
When that happens, oh boy, that's going to be so much money flowing from China to US that it's going to make the dollar even stronger
Normally the exchange rate divergence could be countered by increasing interest rates in the country with the weakening currency. But today it appears most countries are not willing to do this to the extent necessary.
been that way for decades
when global crisis hits again (pretty soon, I'd say), they will have major problems
for now people (carry traders) are happy to borrow yen for 0% and convert and earn 5% in USD, hence the falling yen
Of course, this won't do the already weak yen any favors.