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