0:02 Japan's yen has made a huge move over
0:04 the last seven months, and no one has an
0:06 answer for why. According to mainstream
0:10 theories, JPY should be soaring, not
0:12 sinking. So much so, it's got the
0:14 government in Tokyo hollering about
0:15 currency interventions, of course,
0:17 blaming speculators, saying there's no
0:19 fundamental reason for why the yen is
0:22 doing what it's doing. Except there is.
0:24 There is every fundamental reason for
0:26 this. Starting with what they just
0:29 reported about Japanese households.
0:31 Household spending has utterly crashed.
0:34 And like JPY, this is not just about
0:37 Japan. The problem is, apart from the
0:38 globally synchronized downturn we're
0:41 talking about, mainstream economic
0:42 theories about how things are supposed
0:44 to work like exchange values, they're
0:46 just wrong, they're dead wrong, and
0:48 they're demonstrabably so. The yen is in
0:51 fact behaving exactly how it should. And
0:54 that is the problem. The Bank of Japan
0:56 itself has gone so far that it's emptied
0:58 out the JGB market of any marginal
1:01 buyers with its irrational behavior. But
1:03 rather than rescue JPY, it's only
1:05 compounding everything. It's adding
1:07 financial instability to the already
1:10 poor economic situation. And as I said,
1:12 household spending just crashed, which
1:13 is a warning to the rest of the world in
1:15 a couple of ways. But most of all,
1:17 because it offers more evidence of this
1:20 posttariff distortion payback that I've
1:21 been talking about. Rather than picking
1:23 up as everyone in Tokyo had said it
1:25 would, for Japanese households like
1:26 their American and European
1:29 counterparts, everything keeps getting
1:31 worse. They keep falling farther and
1:34 farther behind, and so does the yen. And
1:36 the fact this economic situation
1:38 continues to plague Japan like the rest
1:41 of the world. Again, that's why the yen
1:43 is doing what it's doing. It's a Euro
1:44 dollar world. So, while mainstream
1:46 economics looks at interest rate
1:48 differentials and everything wrong, the
1:51 answers are all right there. Not just in
1:54 Japan, but how Japan in these ways looks
1:56 like everywhere else. Chalk this one up
1:58 to another thing that mainstream
2:00 economics doesn't just get wrong, it
2:03 gets completely wrong. So we have to
2:05 start with household spending and for a
2:07 couple of reasons. First, the results
2:09 themselves. Wait, do you see these? But
2:11 also because the Bank of Japan has made
2:13 household demand the centerpiece of its
2:15 inflation theory. From all the way back
2:16 last year when the rate hiking got
2:19 started, Casio's position has been that
2:21 consumer price rates were threatened by
2:23 the potential for pentup household
2:25 demand that was ready to be unleashed by
2:28 increasing wage gains. Given significant
2:29 nominal pay rises that were for the
2:32 first time in really a generation,
2:34 supposedly this was going to unlock the
2:36 animal spirits that was long missing
2:38 from Japan. flushed with this earned
2:40 income cash, Japanese consumers were
2:42 going to go crazy and that would propel
2:44 consumer prices into the dreaded
2:46 inflationary spiral or something. This
2:49 was the idea. That was the theory. BOJ
2:50 had to raise interest rates to
2:52 constrains households before they got
2:55 out of control. And not a single part of
2:57 is true. Not one. Even the pay increases
2:59 aren't what they would otherwise appear
3:01 to be. In fact, what you see from the
3:04 income data is what you see all over the
3:06 rest of the world. therefore globally
3:08 synchronized and therefore further
3:10 explains the plight of the yen. So yes,
3:13 Japan is now handing out more income.
3:15 However, higher nominal income isn't the
3:17 thing. It's not the end of the story. As
3:19 Americans know only too well from their
3:21 own experience the past 5 years, those
3:23 income gains are nowhere near enough to
3:26 keep up with the supply shock prices.
3:28 Costs soared and incomes only made up
3:31 for a part of it and for too many people
3:34 only ever a small part. So, Japanese
3:36 households instead keep falling farther
3:38 and farther behind. And you can actually
3:40 see this in the income data. Just like
3:42 when we examine the same for Americans
3:45 and American consumers in re in nominal
3:47 terms, spending looks relatively good,
3:49 rising may be consistent with that
3:51 pent-up demand theory, but adjusted for
3:54 price changes, the entire picture
3:57 changes. This isn't just bad, it's
4:00 getting worse. However much nominal pay
4:03 is rising, it's nowhere near enough. And
4:06 this right here explains why Japan is on
4:07 its third prime minister in a little
4:10 over a year. Yes, you heard me right.
4:11 The Bank of Japan could talk about an
4:14 inflationary economy and recovery that
4:16 it continues to say remains on track
4:18 when Japanese voters keep showing him
4:20 and all the politicians in Tokyo they
4:21 have no clue what they're talking about
4:24 when it comes to small Economics.
4:27 Japan's problem is not inflation. It's
4:30 like everywhere else, the lack of income
4:33 and the lack of recovery. And of course,
4:34 what we're really talking about here,
4:35 we're not really talking about central
4:37 banks. We're talking about Euro dollar
4:40 conditions. And Euro dollar conditions
4:41 have been doing quite a lot and saying
4:43 quite a lot more recently. And we've got
4:45 to talk about what's going on here. Not
4:47 just in the context of Japan and JPY,
4:49 though that's a big one in all of this.
4:51 It really fits into all of this, but in
4:53 the global context. What are these Euro
4:55 dollar signals really telling us? What
4:56 are they really about? And that's what
4:58 we're going to do on Thursday, December
5:00 16th at 6 PM Eastern time. Join me for
5:02 our latest webinar in our series where
5:04 we're trying to fill in all of these
5:06 massive gaps left behind by central
5:08 bankers and economists. If you couldn't
5:10 tell from the theme here in our video,
5:12 you know that not only did they get
5:14 everything wrong and backwards is often
5:16 times quite intentional. So to fill in
5:19 these gaps to to illuminate some truth,
5:20 some facts and evidence, that's what
5:22 this webinar series is all about. And
5:24 the latest one, like I said, Thursday,
5:27 December 17th, 6 PM Eastern time.
5:28 There's a link in the description to
5:29 sign up. We're going to talk about
5:31 what's going on really with these
5:33 currency values and a whole lot more
5:35 beside these Euro dollar signals. I hope
5:37 you can join me. It'll be well worth
5:38 your time. Again, link in the
5:41 description to sign up. So, without
5:43 household income that's keeping up, of
5:44 course, household spending isn't going
5:46 to be either. And in fact, when you look
5:48 at the two together, what it shows is
5:49 that household spending is suffering
5:51 even more than household income because
5:53 quite naturally in the situation,
5:55 Japanese households realizing they're
5:57 falling further and further behind
6:00 become more and more cautious. They're
6:02 not risk-taking. There's not penup
6:04 demand. It's exactly the opposite as
6:07 always from what central bankers say.
6:09 Quite naturally, when faced with these
6:11 kinds of conditions, people anywhere,
6:12 doesn't matter where it is, will look to
6:15 save more than they spend. So yes,
6:16 they're doing the opposite of what
6:17 weight said they would. He claimed
6:19 households would surge into spending
6:21 with some nominal wage increases.
6:23 Instead, spending has fallen sharply
6:25 because those nominal wage increases
6:27 were never close to enough. And they
6:29 know how Japanese households know and
6:31 Japanese voters know this isn't going to
6:34 change. It's basic economics. Now, the
6:35 one caveat to that was tariff
6:38 distortions earlier this year. And like
6:39 everywhere else around the world, the
6:42 artificial high really began late late
6:44 last year. And the Japanese started
6:45 buying stuff anticipating that US
6:47 tariffs might force global prices
6:49 higher. So not even waiting to see if
6:51 cost did go up. Like everywhere else,
6:53 they just went out and bought a bunch of
6:54 stuff rather than take the chance that
6:56 cost would end up going a lot higher.
6:58 And who could blame them? But all that
7:01 front-loading peaked back in May. Now,
7:02 the Japanese government and the Bank of
7:04 Japan, they claimed that that was
7:06 actually that was the pendup demand that
7:07 they were warning about. The splurge in
7:09 spending was wage related. They said a
7:11 couple of years of pay increases finally
7:13 triggered the consumption outbreak. But
7:15 while they said that in public to really
7:18 play up economic circumstances, in
7:19 private they knew it wasn't going to
7:21 hold up. Of course, it didn't. Spending
7:24 fell back almost immediately in June
7:26 before plunging in September and
7:28 especially just look at October. And
7:30 that's not just in real terms. Nominal
7:32 spending has followed the same pattern.
7:35 Tariff distortion leading to now what is
7:37 a warning to the rest of the world. Even
7:39 supposedly inflationary Japan that's
7:41 recovering and all the things that the
7:43 central bank talks about. Even Japan is
7:44 showing these concrete signs of post
7:48 tariff distortion payback. So given
7:50 that, why on earth would the Bank of
7:52 Japan continue to talk about raising
7:54 rates? Now first of all we should note
7:56 the Bank of Japan is only talking about
7:59 raising rates. hasn't actually done any
8:02 rate hikes since back in January. It's
8:05 all theater, but it's in it's theater
8:08 with what is supposed to be a purpose.
8:10 Quite simply, Japanese officials know
8:12 the economy sucks. They know it's
8:13 getting worse, not better, whatever they
8:15 might say in public. After all, third
8:17 quarter GDP just sank by the most in
8:20 almost two years, led by, yep, weak
8:22 consumer spending, plus the faltering
8:24 trade situation. In other words, falling
8:26 exports after we see payback in the
8:29 global external sector. But Japanese
8:31 officials have to appear to be combating
8:33 inflation. Thus, the constant hawkish
8:35 rhetoric that the Japanese people as
8:38 Japanese voters, they see right through
8:40 it. Thus, three prime ministers
8:42 basically in just the last year. What
8:45 BOJ is really trying to do is talk the
8:47 yen back higher. That's the so-called
8:50 inflation problem in Japan. Japanese
8:51 consumers have been hit with those past
8:53 price changes, the supply shock that we
8:55 all know only too well about. But unlike
8:57 a lot of other places, the weekend
8:59 combined with other supply factors like
9:01 poor rice crops that I've talked about
9:03 in previous videos, those have kept
9:06 price changes ongoing to be too high. It
9:08 compounds the negatives for households
9:10 who know they keep falling farther and
9:12 farther behind. Therefore, more than in
9:16 any other places, thus again, three
9:18 prime ministers. The weekend further
9:19 raises the cost of imported necessities
9:23 like fuel and food. And the central bank
9:25 tactic though it has worked at least in
9:27 the respect of the bond market. The
9:29 threat of further rate hikes has chased
9:31 away all the big JGB buyers, the pension
9:32 funds, the insurance companies who don't
9:34 want to be sitting on paper losses
9:36 because you know way might carry out his
9:38 irrational policies. And it's irrational
9:40 in the sense they aren't tied to the
9:42 actual economy like he claims because
9:44 the actual economy looks nothing like
9:46 what he says. But the rise in JGB yields
9:48 from this buyer strike should have,
9:50 according to mainstream theory, worked
9:53 to rescue the yen. The higher Japanese
9:56 bond rates go, the more attractive they
9:58 would look to investors, especially
9:59 those inside of Japan who otherwise
10:02 sends mountain of yen off into the Euro
10:04 dollar world as the carry trade. By
10:07 mainstream theory, those higher JGB and
10:08 other interest rates should be
10:10 attracting huge amounts of capital back
10:12 to Tokyo, which would therefore raise
10:14 the yen exchange value. And as the yen
10:16 rises in response to these rising rates
10:18 and these threats for higher rates from
10:20 the central bank, it should take a lot
10:22 of pressure off of import costs and
10:24 therefore consumer prices, getting
10:26 voters off the backs of all those
10:29 politicians in Tokyo. So you can see
10:31 what the Bank of Japan is really trying
10:33 to do. Get rates up, keep them up as
10:35 much as possible, not because of pent-up
10:37 demand or anything, but to get the yen
10:41 to stop falling. But yet the yen
10:44 continues to fall anyway because central
10:45 bankers and economists have no idea how
10:47 any of this really works. The sad thing
10:49 is you don't have to take my word for
10:51 it. I'm going to show you. And since I'm
10:52 going to show you, that means central
10:54 bankers know this, too. So, you have to
10:56 ask yourself, why do they keep doing
10:58 this when they know it's wrong and they
11:00 know it doesn't work? The answer to that
11:03 is incredibly simple. They have no idea
11:05 how the world's monetary system works
11:07 and therefore what it is and why it is
11:09 that currency values and exchange rates
11:12 do what they do. Instead of trying to
11:14 figure this out, they all fall back into
11:16 the mainstream economics textbook and
11:20 lie to everyone about all of it. And
11:23 Japan in 2025 is the very essence of
11:24 interest rate differentials, too. US
11:26 Treasury yields, by contrast to those in
11:29 JGBs, they're declining. Also, the Fed
11:31 is cutting its policy rate if you care
11:32 about that kind of thing. In other
11:34 words, whether you believe central bank
11:36 policy rate differentials drive the
11:38 currency value or you think that market
11:40 differentials do, in Japan's case, both
11:42 of those are highly favorable to the
11:46 yen, at least in theory. In practice,
11:48 JPY continues to sink. And we can look
11:51 at this from both perspectives. And in
11:53 both examples, as you can see, interest
11:55 rate differentials, that's the spread
11:56 between US dollar rates and yen
11:59 government rates, the differentials have
12:01 declined. They have become more
12:03 favorable to Japan. The additional
12:04 interest offered by treasuries above
12:06 their Japanese counterparts has greatly
12:08 diminished as JGB yields continue to
12:10 climb higher while Treasury yields
12:12 continue to bull steepen their way
12:15 lower. Yet at the same time, the yen has
12:17 gone in the complete opposite direction.
12:20 Total opposite direction. not somewhat
12:22 similar or just a small deviation.
12:24 Completely the opposite of what it's
12:26 supposed to do. And not only that, it's
12:28 worse at the two-year maturity than it
12:30 is at the 10-year. In other words,
12:32 perceived differences in central bank
12:33 policy positions are even more extreme
12:36 in Japan's favor, and it matters even
12:38 less in the actual currency market. So,
12:40 this is where the finance ministry's
12:43 threats of intervention come from. The
12:44 government says that when judging these
12:46 things from the perspective of interest
12:49 rate differentials, JPY should be far
12:51 stronger. It should be strengthening,
12:54 not weakening back toward historic lows.
12:56 But since the currency isn't doing what
12:57 the government and the central bank
12:59 think it should be doing, you know what
13:02 that means? It's time to blame
13:04 speculators. Those dirty evil
13:06 speculators must be back at it, forcing
13:08 the currency to do what otherwise it
13:09 wouldn't be doing. Because without
13:11 speculators, we all know the yen would
13:13 be rising along with those favorable
13:15 interest rate differentials which are
13:17 following. But what if the yen's
13:19 exchange rate isn't actually determined
13:22 by interest rates at all? That would
13:24 completely eliminate not just a
13:25 speculator excuse, it would also
13:28 completely undermine everything that
13:29 officials are doing, everything that
13:33 they've said, the whole operation. They
13:35 have to blame speculators because to
13:37 admit the truth here would be to blow
13:39 the whole economics and central banking
13:42 mythmaking sky high. The yen isn't a
13:43 product of central bank policy
13:46 differences. It's a byproduct of the
13:49 euro dollar. But this divergence between
13:51 what how the yen actually behaves and
13:53 interest rate policy differentials, it's
13:56 actually nothing new. This is common.
13:57 This is the thing that they never tell
13:59 you. They never show you. Nobody ever
14:01 does the homework. Nobody looks up in
14:03 the in the charts and actually sees what
14:04 goes on here. Everybody just says this
14:06 is how it works because everybody says
14:09 this is how it works. This goes back a
14:11 long way in Japan is a perfect example
14:13 of it. And anytimes when you do see
14:15 differentials line up with JPY, they're
14:18 very fleeting, brief, and more just
14:20 accidental correlations than they are
14:23 explanations of causation. That includes
14:25 earlier in this this decade back in 2021
14:27 and 2022. There's really nothing more
14:29 than coincidence. Both the yen and
14:30 interest rate differences were doing the
14:32 same things at the same time. The latter
14:34 wasn't causing the former. That's
14:36 exactly what we see throughout the last
14:38 40 years of exchange rate history with
14:40 Japan. Once in a while, you'll see some
14:42 differentials in the yen. They line up,
14:44 but it's never anything more than
14:46 shortrun and accidental. So, at most
14:48 there might be some periods when
14:50 so-called portfolio flows or capital
14:52 flows, they do chase these differences
14:54 in interest rates from time to time. But
14:57 as you can see, they do not they do not
14:59 explain the vast majority of the yen's
15:01 behavior. And most of all, it's a
15:03 two-year maturity. You hear this all the
15:05 time, how central bank policies are
15:07 they're the biggest most important
15:08 factor in everything, especially where
15:10 it comes to currencies. Yet, they matter
15:12 even less than market differences in
15:14 yields. Just look at the two-year spread
15:17 during the entire 2010s. Zero
15:19 correlation. In many periods, you see
15:21 mostly an inverse correlation, meaning
15:23 the relationship that's exact opposite
15:25 of what economics tells you should be
15:29 taking place like right now.
15:32 So, let's recap the situation in Japan
15:34 after going through the facts and
15:36 evidence and not just wrote reciting all
15:37 of these myths and legends and
15:40 shortorthhands. The Bank of Japan says
15:42 the Japanese economy is in danger of an
15:43 inflationary spiral that's going to be
15:46 led by pent-up demand among households
15:48 who got nominal wage gains for the first
15:51 time in forever. And so they need to
15:54 raise rates to hold back consumers from
15:55 spending so that the robust demand
15:58 doesn't create even more inflation. But
16:00 consumers are holding themselves back
16:01 because they know their incomes are
16:03 nowhere near enough to make up for the
16:05 past, for the present, let alone any
16:08 future price changes that are supply and
16:11 currency matters, not actual inflation.
16:13 Thus, household spending, which is
16:15 already in the dumps, gets worse,
16:16 especially now after the tariff
16:18 distortions have passed into global
16:20 payback. That's another key point from
16:22 Japanese household spending. In reality,
16:25 BOJ is targeting the yen, not really the
16:27 economy, but doing so hoping
16:29 increasingly favorable interest rates
16:31 inside of Japan will somehow strengthen
16:36 JPY. Except JPY is predictably,
16:37 according to the facts and evidence and
16:40 history, completely ignoring interest
16:41 rates. All of which just begs the
16:44 question, where does Japan's exchange
16:47 value really come from? And the answer
16:51 is Japanese household. Now, I don't mean
16:53 the Japanese households are out there
16:54 investing their funds overseas and
16:56 therefore weakening the yen through
16:58 investment flows or contrary portfolio
17:01 flows. I mean the economic plight of the
17:04 Japanese themselves and how similar it
17:06 is to what we see around everywhere else
17:08 around the world. The same experience
17:11 you get with voters in Japan is like
17:14 those in Germany or New Zealand or if
17:15 Republicans don't start paying closer
17:17 attention to the plight of the people
17:18 rather than pointing to stock prices.
17:20 You'll see the same thing here in the
17:23 United States. The yen is just the other
17:26 side of the dollar, which means euro
17:28 dollar. The rising dollar exchange value
17:30 is the euro dollar reflecting on these
17:33 poor and deteriorating fundamentals of a
17:35 global system that never recovered from
17:38 2020 or 2008 for that matter. And
17:40 because it didn't recover, the
17:42 underlying economic situation in nearly
17:45 everything in nearly everywhere is
17:49 deteriorating rather than improving. A
17:51 world where households from Japan to
17:53 China to Germany to the UK and
17:55 everywhere in between, where they're all
17:58 falling farther and farther behind, is a
18:00 world that's going to lead to tighter,
18:02 more scrutinizing monetary conditions.
18:04 Common sense basic economics. And those
18:06 tighter scrutinizing monetary conditions
18:08 are what push the US dollar exchange
18:12 value higher. And in this case, the yen
18:15 lower. And as you can see, it doesn't
18:17 matter one bit what central banks are
18:19 doing, what they're going to say they're
18:21 going to do, or what they may plan to
18:24 do. We are living in the Euro dollar's
18:26 world. And that, my friends, is why the
18:29 yen is sinking, why Japanese households
18:31 are getting crushed, and why we should
18:34 all be preparing for more payback as the
18:36 global economy, the globally
18:39 synchronized economy becomes more, not
18:42 less certain.
18:44 And we can see the same types of things
18:47 for US households through the US housing
18:49 market, prices, the changes and
18:51 behaviors that are going on there. All
18:53 of that in the video link below. As
18:54 always, thank you very much for joining
18:56 me. I hope you can join me on Tuesday,
18:58 December 17th. There's a link in the
18:59 description to sign up for a webinar.
19:01 Huge thanks to URL University members
19:04 and subscribers. And until next time, take
