Extract from ABC News
Analysis
A notepad in front of US Secretary of the Treasury Scott Bessent reads: "To Do … Buy Japanese Yen … $5-10 bill". (Reuters: Daniel Heuer)
When the Trump cabinet met at Camp David last week, the US Treasury secretary, Scott Bessent, ostentatiously put a "to do" list in front of him, where it could be seen by journalists.
"To Do," it said. "Buy Japanese Yen (JPY) $5 — $10 bill."
Bessent used to make big currency bets for George Soros in his former life as a Wall Street banker, so knows full well the power of such signalling, even before you actually do anything.
Japan and the US later announced that they had jointly intervened to prop up the yen after it had fallen to a 40-year low.
Bessent portrayed the move as the act of an ally and partner of Japan. But the US also has a huge vested interest in a stronger yen.
Not only does a weak yen make Japan ultra-competitive against the US, it poses risks for the US Treasury bond market.
Japan is the largest holder of US Treasury bonds. If those bonds get sold off to support the currency, it puts their price down and, conversely, long term US interest rates up.
That's seen as one of the reasons why this particular intervention happened by the US selling euros, rather than US dollar, in exchange for yen.
US and Japan move to support the yen (Kirsten Aiken)
Warnings from the 1997 crisis
There is also a regional dimension to this story. A crash in the value of the yen was a contributing factor in the lead-up to the Asian financial crisis in 1997.
A competitive devaluation wave across South East Asia now could be ugly.
The 1997 crisis was primarily a result of structural weaknesses like rapidly deregulated financial sectors and volatile short term capital flows.
There are new, different but also dangerous flaws in some Asian economies right now.
Most notably, South Korea — which should be enjoying the absolute economic sunshine of its dominance of the microchip and memory market — is instead flailing under share market volatility fed by over-leveraged investors, and also a share market too heavily dominated by a couple of the largest manufacturers of semiconductor technology, like Samsung.
The result has been a 40 per cent drop in the market's value in the space of just 27 days, leaving thousands of investors who had borrowed in order to invest facing financial oblivion.
The very volatility of the market — which so far in 2026 has had 33 days of movements of at least 5 per cent — has now made South Korea look like a highly risky investment.
Indonesia also has problems stemming from an overly ambitious and expensive government spending program.
Not all the news is bad out of Asia.
Vietnam's President To Lam is due to visit Australia in the next few days. (Reuters: Minh Hoang)
Vietnamese President To Lam will visit Australia in the next few days. His country has been the fastest growing economy in the region in the past couple of years with growth rates of around 8 per cent a year.
That's despite initially being one of the biggest targets of Donald Trump's Liberation Day tariffs last year.
Malaysia and Singapore — which were also in the firing line — are also booming in the way that South Korea should be, thanks to their big presence in IT hardware.
And that's despite them being among the most energy intense economies, and/or the biggest importers of oil and gas at a time when the Middle East conflict has both pushed up prices and cut supply of both commodities from the Gulf.
So the IMF has still been predicting that Asia will remain the main driver of global growth, with India and China accounting for about 70 per cent of that.
Perhaps more than any other part of the world, Asia is now riding the impact of all the biggest disruptions to the global economy.
There's the continuing uncertainty about energy supply; a boom in AI investment of such magnitude that central bankers discuss its potential to destabilise the financial system; and there is inflation.
Not just an energy price shock
It's not just inflation stemming from an energy price shock either.
The sudden escalation in government spending in the name of building defence capabilities is creating pressures around the world, prompting governments to massively expand their spending even when inflationary surges suggest they should be cutting back.
Japan is at the epicentre of these pressures. Once the stand-out growth economy, the "miracle" economy in the 1980s, it has struggled to find its way back from decades of deflation to growth, only to now find itself suffering from inflation partly driven by the fact its low interest rates have depressed its currency and delivered high prices and inflation across the economy.
While it is making a mark in robotics, it is not the leader in AI that competitors in the region have proved to be.
And it has been rapidly escalating its military spending amid the fears — shared by many US allies — of abandonment even as China projects its power into the region.
That all creates big tensions in economic policy between an expansionary fiscal (or government spending) policy and a monetary policy ambition which should see interest rates rising to curb inflation.
Japan, US act to stabilise yen currency
The Bank of Japan has raised rates five times from their record lows, halving the differential with US interest rates.
But it now faces the difficulty of choosing between a path which raises rates to further reduce that differential — and hopefully stop further devaluation of the currency — but at the cost of killing off nascent growth, or stalling for time.
Unlike many other central banks, the BoJ's charter requires its actions to be mutually compatible with government policy.
Which is perhaps why it has instead been buying yen in the market to boost its value — an intervention which some analysts have estimated could have amounted to 13.8 trillion yen or $US87 billion over just two days.
So many conflicting economic signals usually demand some clear economic signals from central banks and ministers.
But if there is another trend at play just now it would seem to be a shift away from clear signals, and even from central bank independence.
The well-respected governor of Bank Indonesia Perry Warjiyo suddenly resigned last month in a move which unsettled markets at a time when the government's budget policies have kindled inflation.
There is much more disquiet, though, about just what is happening at the US Federal Reserve.
Kevin Warsh announced a new communications strategy which does not indicate where monetary policy might be heading, which has done nothing to settle financial markets. (Reuters: Kevin Lamarque)
Central bank's independence in question
Trump's appointment of Kevin Warsh as Fed chair came after his regular attacks on Warsh's predecessor Jerome Powell, who Trump regularly threatened to fire for not cutting interest rates fast enough.
In an interview with the Wall Street Journal last December, Trump said he wanted the Fed chair to consult with him on where to set interest rates.
"I'm a smart voice and should be listened to," Trump said.
Now this week the WSJ has reported that the president has repeatedly spoken with Warsh since he became chairman of the Fed three months ago.
That, and the fact that Warsh has announced a new communications strategy which does not indicate where monetary policy might be heading, has done nothing to settle financial markets.
Confidence in central bank independence is not on a good trajectory right now.
The decision to intervene in the yen was also marked by a lack of coordination with others.
The Financial Times reported on Friday that "Washington's sale of euros to boost the yen late last week blindsided the European Central Bank, with the US only informing its counterparts in Frankfurt after the historic currency intervention".
"Typically, the US would have been expected to use dollars in such an operation," the FT reported.
"Some senior ECB officials viewed the US decision to use euros in its trade as an unprecedented breach of longstanding conventions on co-operation between western monetary authorities, the people said."
Washington's sales of euros, carried out by the New York Federal Reserve on behalf of the US Treasury, were "very striking" and "sad", one person familiar with discussions among European policymakers told the FT.
Global economic policy now seems at the mercy of an exceptionally casual approach to information, scribbled on a notepad, awaiting an update on Scott Bessent's to-do list.
Laura Tingle is the ABC's Global Affairs Editor.
No comments:
Post a Comment