US-Japan Cooperation in Yen Buying is 'Quantitative Easing'... Fed's Money Supply, Bond Market Chaos, and Opportunities for Bitcoin

[Block Media Reporter Lee Jeong-hwa] As the United States and Japan embark on an unprecedented joint intervention to buy yen, analyses suggest that the Federal Reserve is engaging in unconventional quantitative easing (QE).

QE involves the Fed mobilizing its dollar issuance power to supply large-scale liquidity to the market, affecting not only stocks and other risk assets but also the prices of alternative investment assets like gold and Bitcoin.

However, in the long term, this could lead to inflation and cause chaos in the bond market. There are concerns that this action could trigger a 'Sell America' phenomenon.

On the 6th, major U.S. economic media outlets such as the Wall Street Journal (WSJ) and Bloomberg reported that voices of concern are emerging in the bond market regarding the impact of the U.S. and Japanese financial authorities' intervention in the foreign exchange market.

Unconventional Yen Exchange Rate Intervention Conflicts with Fed Policy

The joint intervention in the foreign exchange market by the U.S. and Japan is proceeding in an unconventional manner that deviates from traditional methods. This could hinder the Fed's shift towards tightening and cause serious disruptions in financial markets, including the bond market.

Recently, the yen has plummeted to its lowest level against the dollar in 40 years. The U.S. and Japan conducted their first joint intervention to buy yen since 1998. However, the unconventional funding structure and inconsistent policy messages that arose during this process have inadvertently increased skepticism among global investors regarding U.S. assets.

Unprecedented 'Unconventional Bypass' to Avoid Shock in the Treasury Market

The traditional method of foreign exchange market intervention involved Japan selling its holdings of U.S. Treasury bonds to secure dollars, which would then be injected into the foreign exchange market to buy yen. However, U.S. authorities were concerned about the shock that a large-scale bond sale would have on the already unstable U.S. Treasury market.

As a result, the U.S. Treasury chose an unprecedented unconventional bypass. Instead of selling U.S. Treasury bonds held by Japan, it encouraged Japan to borrow dollars through the Fed's emergency repurchase agreement (Repo) window, using those bonds as collateral to inject into the foreign exchange market.

In effect, the U.S. is essentially printing dollars to support Japan's yen-buying funds.

To prevent direct chaos in the U.S. Treasury market, a mechanism was also employed to buy yen via euros.

Nathan Sheets, Chief Economist at Citigroup, stated, "U.S. authorities were very concerned about the potential impact on the U.S. Treasury market if intervention occurred through traditional means."

Nathan Sheets interpreted that "Treasury Secretary Scott Bessent is closely monitoring the U.S. Treasury market, and this intervention shows that there were potential tail risks he had to manage."

This indicates an effort to avoid unintended massive shockwaves to the U.S. Treasury market while trying to prevent yen depreciation.

Regarding these intervention measures, Secretary Bessent explained that there was a risk that yen depreciation could lead to a simultaneous depreciation of other Asian currencies.

In an interview with the media, Secretary Bessent stated, "We will take all necessary measures to help Tokyo in a way that benefits the U.S. economy and stabilizes global markets." He also clarified that the intervention through euros was merely a redistribution of U.S. foreign exchange reserves, stating, "We have been in close contact with our European partners."

Conflict with Fed's Monetary Policy Direction

However, this foreign exchange market intervention through loan support directly conflicts with the Fed's policy direction, which aims to tighten monetary policy to combat inflation.

As the U.S. supports intervention through dollar loans, the Fed's balance sheet is artificially expanded, injecting billions of dollars in liquidity into the market. This essentially produces effects similar to quantitative easing (QE), which will inevitably offset the effects when the Fed pursues tightening policies in the future.

In particular, this unconventional operation directly contradicts the policy stance of Fed Chair Kevin Warsh, who has publicly advocated for balance sheet reduction. As a result, the Treasury's unilateral intervention policy has forced the Fed to undertake unwanted monetary easing measures.

Last week, the Fed signaled a 'hawkish rate freeze,' but by intervening in the yen market, it has paradoxically injected massive funds into the market.

Ambiguous Policy Messages and Reignition of 'Sell America' Debate

Factors contributing to market confusion include not only the funding structure but also various other causes. The Fed under Chair Kevin Warsh has shown a passive attitude towards communication, increasing skepticism about its commitment to fighting inflation.

Additionally, reports of unusual frequent contacts between President Donald Trump and Chair Warsh have shaken policy credibility. The WSJ reported that Trump frequently called Warsh to seek advice on the economic impact of the Iran war. It is not immediately known whether the two discussed monetary policy during these contacts.

The very fact that the Fed Chair, who must maintain independence, is frequently 'called' by the President undermines market confidence.

With the Treasury's yen intervention measures added to this, criticism has arisen that Washington's economic policy direction has become very ambiguous.

As a result, investors have begun to demand a policy risk premium. The yield on 30-year U.S. Treasury bonds has surpassed 5%, the highest level since 2007. The term premium associated with long-term Treasury holdings has also surged to its highest level since 2013, reaching 1.56%.

Rajeev De Mello, Global Macro Portfolio Manager at Gama Asset Management, stated, "The actions of Secretary Scott Bessent and Chair Kevin Warsh represent a double blow that global investors cannot ignore."

Rajeev De Mello pointed out, "Investors need to reflect policy risks in the value of the dollar and the yield curve of Treasury bonds, and they are indeed starting to take such actions now," indicating that the dollar value is falling and Treasury yields are under upward pressure.

The market is showing signs that the 'Sell America' trade, which involves dumping both U.S. Treasuries and the dollar, is re-emerging.

Triggering Dollar Weakness

Carol Lye, Money Manager at Brandywine Global Investment Management's Singapore office, stated, "This combination of confusing messages does not help foreign capital inflows into the U.S. at all."

Carol Lye argued, "Secretary Scott Bessent's actions to support yen strength further corroborate their outlook for dollar weakness."

Steve Brice, Global Chief Investment Officer at Standard Chartered's Singapore office, also stated, "Investors have an extreme aversion to uncertainty."

Steve Brice predicted that the government's unconventional actions are eroding the structural strengths of the U.S. market, forecasting that the dollar value will decline by about 3% to 4% over the next 12 months.

Ranjiv Mann, Senior Portfolio Manager at Allianz Global Investors, warned, "The Fed risks falling behind in the rate hike cycle to respond to inflation, which could lead to the back-end of the yield curve becoming unanchored."

Ronald Temple, Chief Market Strategist at Lazard, also stated, "There are numerous doubts swirling in the market regarding the belief that the U.S. is a safe haven asset, and I expect the downward trend in the dollar's value to resume in the coming years.

If confidence in the dollar wavers, alternative investment assets like gold and Bitcoin are likely to gain market attention.

Limitations of Unconventional Intervention

Amid these widespread concerns, the joint intervention temporarily lowered the dollar/yen exchange rate from around 164 yen to 155.21 yen, creating a short-term effect of yen appreciation.

However, just days later, the yen exchange rate rose again to around 158 yen. Analysts suggest that without fundamental structural improvements, it will be difficult to maintain yen appreciation solely through foreign exchange intervention.

Michael Wan, Chief Foreign Exchange Analyst at MUFG Bank, acknowledged, "It is true that joint intervention can play a significant role in liquidating the positions of yen sellers in the short term."

However, Chief Foreign Exchange Analyst Michael Wan stated, "As Japan's real interest rates remain low and market anxiety about the government's large-scale fiscal spending continues to prevail, a fundamental change is ultimately necessary for sustained appreciation of the yen."

Paul Mackel, Head of Global Foreign Exchange Research at HSBC, stated, "There is a strong possibility that U.S. and Japanese authorities will continue to coordinate additional foreign exchange market interventions depending on market conditions."

In fact, Japanese Prime Minister Sanae Takaiichi is strongly hoping for an expansion of government spending to stimulate the economy. Such efforts to increase spending could further exacerbate yen depreciation and create a vicious cycle of deepening fiscal deficits.

Ultimately, if the time comes for Japan, the largest holder of U.S. Treasury bonds, to sell off a significant amount of its Treasury holdings to defend against yen depreciation, there are concerns that direct shocks to the Treasury market cannot be avoided.

Skylar Montgomery Koning, a Bloomberg strategist, stated, "With trust in the Fed's ability to curb inflation under Chair Kevin Warsh being undermined, U.S. Treasury yields are already under strong pressure. This is why the U.S. government has had to find ways to suppress and circumvent Japan's forced sale of Treasury bonds."