The Japanese Yen Will Soar – USDJPY versus Japanese bond markets & FXY ETF
The Japanese yen will rally versus the US dollar. Now, we’re seeing a shift already begin with the dollar starting to sell off. Japanese yen itself overvalued relative to its sort of median level over the past several decades. We’re transitioning. The United States is transitioning from one epoch, one landscape of economic activity where we were in a loose monetary era after 2008. We’re seeing a big shift. At the same time, Japan is seeing yet another shift. Uh an economy that has lagged for significant periods of time. They’re finally catching up in some areas, but now all of a sudden, they’re talking about higher inflation. Their interest rates are moving higher. A lot of Japanese investors invest in the United States. We could see that trickling downward. Because of that, that could trigger the Japanese yen rally. When the Japanese yen rallies versus US dollar and all the other carry trade currencies, sterling, uh, euro, Swissy, all those others, the Japanese yen could move big, real big. I don’t know that we’re necessarily going to see that anytime soon, but I’m building up a position uh against the US dollar for the Japanese yen. What I’m doing is uh I’m selling short dollar yen, going long FXY, which is an ETF, and I’ll break that down for uh those who don’t have access to the uh FX market, but instead trade ETFs. Uh, I’m looking for some appreciation in the Japanese yen over the course of say the next year, year and a half, maybe six months. We could see a big shift out of the US dollar and that could be profitable real fast. Let’s jump in. I’ll break down the economics and why I think the Japanese yen is just starting a big journey to higher elev uh valuations relative to the dollar. Let’s jump in. Here’s a look at dollar yen from about 1990 all the way to uh present day. Now, for those who are just finding me for the first time, first and foremost, I’m an economist and I break everything down from economic perspective and how money is flowing. Secondly, FX former FX hedge fund manager entirely my wheelhouse. This is where uh I sort of shine the most when it comes to looking at world economies and figuring out what’s next with these markets. Dollarary yen, of course, as you can see, we’re pretty high on a relative basis. Um I could see 120 easily being hit with dollar yen. And I for those of you who have been following me for any period of time, I tend to speak more in terms of ETFs and I do have that chart on here. But so if you are looking at an ETF from a perspective of that, just flip it in your mind. Uh this is the US dollar would fall versus Japanese yen. And seeing this fall from 145 down to about 120, that’s not a long shot. Seeing it go down to 100, 110 to 100, again not a long shot. Japanese yen is significantly overvalued relatively if you look at this and kind of pick a median level. Now, we’re coming from a period where there was ultra loose money uh for the United States. Just after 2008, the Federal Reserve actually had to come in and kick in with QE uh programs. We’re on our fourth or finishing our fourth or being seeing the fourth being removed from uh the first three were because of the 2008 financial crisis just getting the economy moving back forward. Then of course co all the world economies were affected equally. Japan Japanese are notorious savers. The problem with Japan is their economy or their population is shrinking dramatically. This will happen to the United States of America. Now we’re seeing a lot of news. The big beautiful bill of course is highly it it will create a a significant deficit for the US and so the bond market’s looking at that saying yeah long-term interest rates will go higher. Japan seeing exactly the same thing again. We’re seeing uh bond yields in Japan starting to move higher. Now those notorious savers were moving into the United States. And in order to do that you have to sell Japanese yen and buy US dollar. And as you can see since co that uh that’s exactly what we had seen. Well, this is all unwinding at this point. And in fact, the Federal Reserve has been reducing its balance sheet and they’re probably going to continue to uh do so, but at a slower pace. Simultaneously, however, we’re starting to see news that potentially the Federal Reserve could raise interest rates instead of lowering. Japan’s kind of looking at the same thing. They’re looking at a massive deficit. The prime minister basically said, “Yeah, whatever you guys are working on talking about right now, I will not sign that into law.” So, there’s a lot of shift and with higher interest rates in Japan, that money trickling into the United States is likely to stop and we’ll start to see money repatriate. Now, the thing is with um Japan, when the Japanese yen moves, boy, it has a chance to really move fast. If you’ve never read this book, such a great book, When Genius Failed. All right. Long-term Capital Management as an FX hedge fund manager. I started out 9798, right about that period of time. I was 29 moving into 30. Um, this we had the Asian financial crisis. We also had Russian default debt. And we had a significant amount of money invested from the Japanese into bonds. And all of a sudden the bond markets shifted significantly. And if you look sort of dead center in this chart and move backwards, you can see that the Japanese yen uh this would be 9798. It had fallen sort of that peak right where the line is at 144 all the way down to about 110 real fast all through 9798. Read that book. It’s fascinating. And you’ll see how things are interconnected. And when something happens in Russia, which anything could happen in Russia right now, it affects Japan, United States, Europe. So that’s something uh if you’ve not heard of that book, if you’ve not read that book, it is fascinating from the perspective of how the markets moved. Um and that’s all about long-term capital management. So who owns the most US Treasury debt? As it turns out, Japan’s in first place. China’s actually has been dwindling uh the debt that the U uh they own of the United States significantly. The United Kingdom is actually pushing towards uh being actually according to this it looks like the number 779 versus 765 for Japan uh China sorry UK is in second place although I don’t know why that chart’s not sort of flipping. If Japan stops increasing and they start to decline down less than 1 trillion, this would be, you know, that’d be about a 10% decline. That would be huge for the United States. It’s only a 100 billion. Yes, think that through. China is already shifting out. What happens if Japan does as well? economic growth here in the United States would be affected significantly simply because of uh interest rates moving higher and higher. Now, that could draw in more investors, but at the same time, you’re seeing Japanese in uh interest rates moving higher as well simultaneously. So, it’s not a one for one linear relationship. Oh, interest rates move higher, investment dollars move in. At the same time, uh there’s a ton of cash laying around looking for something to do here in the United States. I think we own about 78% of our own debt via u various entities whether it be US investors, uh institutions, the government itself owning debt through social security and retirement, pension funds, things like this. Um, so to see a big shift like that, that would really significantly move markets across the board. Japanese yen would rally in that if they started to send their money back home again. Their interest rates are moving higher. Here’s a look at Japanese government bonds. The 30 is the blue, greenish blue. Red is the 10 for Japan. And as you can see, we’ve they’ve bought them. they were um they were 2016 through 2020. This is when the United States was really trying to kick in on QE3. Then 2020, of course, COVID came in. Um and that’s when money started leaving Japan and went elsewhere. Now they’re sort of reversing that. What’s happening is the Bank of Japan is no longer buying as much Japanese debt. All right? So, they’ve been propping price up, which is has kept interest rates low. What they had hoped was that by flooding the market with all this money that there would be inflation. Now, all of a sudden, they’re saying, “Well, we’re just going to sort of hit the brakes because they’re not buying. Interest rates are moving up. This will bring money back in.” At the same time, the government’s sitting there saying, “You know what? We’re at 230% debt to GDP ratio. We’ve been at 240. It didn’t seem to matter. Let’s just keep going. United States is looking at saying, “See, no problems there.” Here is United States uh the Japanese government bond. This is the same exact chart. The blue here is the same exact number versus the the 30-year uh bond for the United States. So we’re seeing sort of a move higher in both and it’s because of fiscal policies throughout the world. Inflation, these tariffs are inflationary. Uh we will see higher debts deficits which will push uh the debt to GDP ratio back upward. We’re at 124 now. We were at 122 going in through 2024 here in the United States. And that will continue to increase. So, as these yields on government bonds in Japan continue to increase, if they were starting to catch up to the United States, uh we’re at what 4.37 versus uh just shy of three. What happens if they hit to three and a quarter, three and a half? But the US doesn’t sort of get there as much. that breakdown in that differential would be enough to push Japanese yen higher versus US dollar. So something to keep in mind because of the carry trade that would break down the carry trade which is separate from a Japanese investor simply moving their money into the United States. Carry trade uh has to do with carrying over a trade in New York past close, what they consider close for a business day in New York City. If you’re long the higher interest rate versus the lower in this case the spread on here is about one and a half% a little more than one and a half percent. You earn that on a peranom basis by carrying that over for one day. It’s a contract but you involving in interest rates moving forward. So that’s how that functions within the FX market. If this narrows the carry trade plummets and dollar yen rallies and that’s something I’m looking at. Here’s a real quick look. Japanese population they continue to increase their debt more and more and more. Problem with that is debt governments when you run deficits it’s a pyramid scheme. You need more and more people. They are seeing less and less people. Their population right now is the same as it was back in 1992. That is 23 years ago or 33 years ago. They’re shrinking. Their debt keeps growing. Do the math. And here it is. debt to GDP ratio for Japan. They’ve kind of moderated things, but they need to pay down that debt with less and less individuals to pay down that debt. That’s how that works. It is a pyramid scheme. Governments are a pyramid scheme. If you and I try to put together a pyramid scheme, we would be put in prison if the government do does it. So anyway, um looking backwards they are they’ve done a pretty good job but you can see in 2020 of course uh when they went into a recession there was a big jump higher in debt to GDP ratio in Japan United States was exactly the same. The thing with this is uh simply if we continue to see the same increasing rate of the Japanese government bonds and simultaneously there is a recession something that they are fearing right now in Japan those bond yields could shoot up higher that would narrow that carry trade and Japanese yen would rally the US dollar yen rate would collapse. go back to when genius failed the book. It will give you an idea that when these things move, when interest rates move, it affects the currency markets and it could potentially bankrupt entire countries. Uh Russia of course defaulted, but that was more of an effect versus the cause itself, but it caused so many other issues. Nikk 225 225 is um this is the the the S&P 500 version for Japan. And as you could see, I mean, they’ve had more than just lost decades. I mean, they’ve had three lost decades effectively going into the 1980s into 1990. Of course, um this is when Japan was on fire all through the 1980s. It just blew up and then literally blew up. Uh, and we’re starting to get to the point where they’re eclipsing their previous from the highs all the way from 1989. And it looks like this is probably going to be taken away if the US economy is pushed into a recession because of uh the tariffs and economic policies here in the United States. We’re also likely to see debt to GDP ratios move higher which means interest rates would move higher and that would affect of course Japan as well along with all other countries in the world. So the ripple effects that are going to be transpiring throughout here is kind of continuous. Um back to Japanese uh the US dollar yen 1990 to present. So I’m looking at sort of the midpoint in 2019 2020 and I sit there and I say this can be outdone meaning dollar yen could fall sub 100 when you’re looking at this chart. That’s realistic to me. Uh the thing is you could see 10 big figures go in a day with dollar yen. You could wake up and there’s you’ll see When Genius failed, what had happened was every day things just got a little bit worse. And because things got a little bit worse, it made other things a little worse. And all of a sudden, everything just capitulated. Here’s the problem with our financial system. The expectation within the financial system is that it is always a steady as you go, steady as you go, steady as you go. and that the system itself really does not have the capability of sustaining massive speed bumps. 2008 would be a great kind of period of time to look at to say wow those were massive speed bumps and it absolutely obliterated the financial systems throughout the entire world. If we are in a steady as you go pattern with the economies, you you’ll see flows, money flowing back and forth easily. But everything changed January 20th of this year. We are no longer steady as you go. So all the investment sort of criteria that anybody put together to get into these trades previous to January 20th, that’s gone. that steady as you go is no longer there and we could see a massive breakdown in the financial system as more and more money starts to move and as dollar yen starts to kind of go uh further and further. If we break 130 pushing down to about uh I’m sorry, if we break 140 pushing down to about 132 130 128, you’re going to start to see bigger and bigger ripple effects throughout various sectors of the financial system. It would affect the bond market. It would absolutely affect the stock markets. The economies themselves would become affected. Then you start to go back to the big beautiful bill which turns out to be the big beautiful bomb because the expectations there are that tariffs remain in place and that they’re bringing in $375 billion annually in tariffs. What happens if uh a judge comes up and says that’s unconstitutional, you can’t do that and puts a an injunction across the federal government. Now all of a sudden that 375 is gone. The bond market’s not going to be too happy about that. You will see a breakdown throughout the entire system. So we’re potentially looking at moves that could happen inside the bond markets, inside the stock markets, the economies themselves, and Japanese yen would rally, which means dollar yen would fall. And one last look at another chart, FXY ETF. This is the Japanese yen ETF. If you don’t have access to the FX markets, um I could see FXY ETF if I mean honestly I could see it clearing 100. It’s trading about 64 right now. That’s about a 30% move. If it happened within say 6, 12, 18 months, I wouldn’t be surprised because the big shifts that we’re seeing and all the policy shifts will have ripple effects throughout the financial sector. And this is one that I can see uh a continued move and then all of a sudden big problems, seismic tsunami style problems. I do have a small position actually in FXY. Uh I had been buying on the dips. I’m gonna keep buying more and more because I think this thing’s going to go dollar yen. I trade a lot of options on the FX markets and I’m going to continue to do that. Uh some of the styles that I’m doing uh a lot of verticals, especially calls on dollar yen calls. We just had a rally today and I stepped in sold a three-day uh dollar yen uh vertical on there credit spread. What I’m looking for is a that we’ve peaked in dollar yen. Japanese yen will move higher versus the US dollar at this point. Dollar yen moving lower. Uh and I can I will expect that that continues throughout the next couple of weeks, months and that eventually FXY ETF could easily breach 100. This will take time. So, this is something I’m going to be talking about regularly because of the big ramifications and the possibility that this could move. I do not see any sort of anything going on here where the US economy is going to expand and get back on track to where it was prior to the tariffs themselves. The policies have uprooted the steady as you go. We’re entering a new epoch landscape economy where policy makers just they look at 122% and say, “Well, Japan’s doing 240. We got plenty of room. What do we care? As long as we get our tax breaks, okay, the markets are going to move because of that, and I’m going to take advantage of that.” Make certain to follow the links to my Substack newsletter where I kind of break down a lot more of these, get a little more specific with some of my trades. Uh, and we’ll see you in the next video.
The Japanese yen has been undervalued for some time. Interest rates had been artificially low in Japan for some time. After the financial crisis in 2008 the percentage of ownership in US Treasuries increased significantly and has remained high since then. In this video, I break down the relationship within the financial sector the USDJPY or FXY ETF. Also, in this video I break down what will occur next with bond yields based upon a shift outward in in Japanese investors.
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Now, however, the US economy is shifting to a less-foreign friendly environment. At the same time, Japan’s economy is seeing increases in inflation. This is pushing long-term interest rate yields upward for the JP30Y—the 30 year Japanese Bond yield. With higher interest rates at home, Japanese investors have less incentive to buy US Treasury debt.
If Japanese investors begin unwinding their US Treasury holdings, then repatriate their funds back to Japan, the economic shifts could be dramatic to the point of a tsunami.
My shift in investments is taking into consideration what is likely to occur in the bond markets for the US 10 year treasury, the 30 year US treasury,, FX markets with USDJPY & FXY ETF, and equity markets.