What Is Going On With The Yen? Japan's Only Real Outlet Is Weaker JPY

Here is my current take on the recent moves in the Yen

The angle I am wrestling with is why would Japan actually be so concerned about Yen weakness now given this is their only real policy option in a Triffin’s Dilemma World where they need to keep their capital account open if they want to be a legit export player and while having extremely elevated debt levels as % of GDP means they cannot raise interest rates rapidly without bankrupting the BoJ and domestic banks. 

Yen weakness seems to be their intended policy prescription the entire time as they have recognized that they want to be a strong player in a resurging mercantilist global economy and they will have compete with stronger Chinese competitors in the future on highly valued exports where they have dominated for decades. 

This is even more true for Japan today that they have to compete with China who is able to buy heavily discounted energy from Iran and Russia and can purchase that energy in RMB. If Japan is going to keep paying up for energy in US$ instead of printing JPY to buy energy and is not going to purchase energy from sanctioned producers, their only outlet to stay competitive is weaker JPY. 

If however they are able to buy oil and gas in JPY, rather than US$, they can print JPY to buy energy and then Saudi /UAE/Kuwait could take those JPY to buy goods and services from Japan or buy Japanese assets or make FAI investments in Japan. This would slow down the need for Japan to sell USTs to raise US$ to buy more expensive energy, keep their trade account in better control and reduce the pace of imported inflation, which many believe is the reason Japan will intervene in the first place. Weak JPY has also been a boon to domestic tourism industry in Japan which helps their current account as well. 

If the energy producers then have leftover JPY after trading for goods and services, and after investing in Japanese local economy or in financial markets, they can settle the balances by requesting gold (assuming they don’t want to hold JGBs). 

What if instead of Japan coming to the US a few weeks ago was less about asking for the US to revalue and more about Japan telling the US it can no longer simply be a vassal state of the US being forced to continue the petrodollar system by having to buy energy in US$? 

Japan needs to be able to print JPY for energy to compete with China and came to the US to tell Biden and Yellen this is what they are going to do otherwise they are going to just sell USTs to raise US$ to buy more expensive energy and further push the US government finances into disarray. 

The US will be pissed off about what Japan is trying to do but really what can the US do at this point to stop them when Japan owns $1.1trn in USTs that it will need to sell to defend the JPY? 

What can the US offer Japan instead at this point except for the blessing to price energy in Yen? The US needs Japan to not sell its USTs while Yellen is trying to sell all of hers with a deficit that continues to grow into perpetuity. Allowing the Japanese to buy energy in JPY helps everyone out. Slowing down foreigners desires to dump their USTs is in the US strategic interest now. It is now in the US’ strategic interest to slow down the sale of foreign holdings of USTs because the Treasury has to fund deficits for as far as the eye can see so it can’t afford to have foreigners adding to the selling of USTs.

Maybe that’s where we should be looking rather assuming immediate JPY intervention. I suspect we are going to continue to see much weaker levels for the JPY in coming months