The Geopolitics of the Yen
Capping the greenback, blocking China
Last year, then-prime minister of Hungary, Viktor Orban, in the runup to the Hungarian national elections, unveiled a “financial shield” with the US. Should the Hungarian economy destabilize, such as the national currency (the Forint) crashing or the eurozone shaking, Washington would provide a backstop to Budapest - potentially up to $20 billion. It was an early sign of how finance and geopolitics were weaving together in unexpected ways, such as two right-leaning leaders backing each other through capital.
More recently, the joint-US-Japan intervention to prop up the Yen at the end of July, represents a deepening of this new financial-geopolitical axis. The Yen, at its lowest level since 1987, driven in part by Japan’s debt, pushed the Japanese Ministry of Finance and the US Federal Reserve Bank of New York (at the direction of the US Treasury) to buy up to $58 billion worth of Yen by selling euros and dollars. The last time the US and Japan did this was in 1998 during the Asian Financial Crisis.
However, monetary policy was not the only driver. The US specifically mentioned economic security as the rationale for the intervention. What does this mean?
A Yen that is rapidly depreciating carries many risks. Of them, two are geopolitical (and geoeconomic).
First, a weaker Yen opens the door to countries like China scooping up deals throughout the Japanese economy on the back of a depreciating currency. Whether it is real estate, technology, or manufacturing, adversarial nations could exploit the Yen’s position and attempt to acquire critical Japanese assets.
Second, and perhaps more importantly, if the Yen’s devaluation is not stopped (and reversed), the sovereign foreign reserve holdings around the world take a hit. This may prod some to invest more in alternative currencies, including crypto, as confidence in the Western currency basket wanes.
For some, the US-Japan intervention might seem counterintuitive in a backdrop of America First. Why would Washington move to strengthen the currency of another nation?
But there is a third part here that is going under the radar. If the US lets the Yen fall, of the many shockwaves, one of them will be another rush to the dollar (flight to safety). A stronger dollar does not benefit US exports. A stronger dollar is exactly what administration officials have been seeking to change for more than two years.
This means, the US is playing strategic finance, propping up allied currencies to create an artificial cap on the greenback. Equally important, often times, Japan’s central bank sells US treasuries to intervene in currency markets. With the US involved, Tokyo retains its American bonds, securing the US from another angle.
The irony here is that one of the causes of the Yen’s collapse is the US-Iran war. The US is helping Japan prop up a currency that is weakening because of a war the US is waging thousands of miles away.
All of this signals a deepening convergence between finance and geopolitics, and overall capital movements.
What the US has done with Japan may not be isolated. First the proposal of a financial shield with Hungary. Then a bailout of Argentina. Now aid for the Yen. The next US allies and partners who face financial disturbances, from South Korea to Gulf states, America could offer help in the form of capital injections. Currency intervention, swaps, or bailouts/loans could return as a powerful driver of American geostrategy. And unlike in the past, when it was predominantly US institutions that played financial-geopolitics (i.e, World Bank, IMF), today, it may be exclusively the White House.
In tandem, by acting this way, the US is setting the stage for others to get involved. In an era when many are eyeing sovereign capital, actors in Europe may resist American intervention (likely with strings attached). Others, such as China, may offer their own bailouts or swaps, including around the dollar, to battle America.
None of this is ordinary de-dollarization, replacement of SWIFT, or the globalization of Yuan, the de-facto thoughts that get raised when one discusses finance and geopolitics. What is taking place is completely different.
Geopolitics is having a knock-on effect on financial markets across the globe. Nobody is immune. And the solution to the geopolitics is more geopolitics (i.e., Tokyo-Washington intervention). The end result is heightened global competition as governments eye financial or economic meltdowns as prime opportunities to rekindle relationships or expand their power. And, in the backdrop, a massive shift, where the driver of financial markets may not only be interest rates or holdings, but a fight between maintaining or changing the balance of power around the globe.
—Abishur Prakash aka “Mr. Geopolitics”
Have questions or ideas? Let’s talk: abishur at mrgeopolitics dot com
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