Every Time This Happens To The Japanese Yen, Markets Break — We Had To React

On this episode of Impact Theory with Tom Bilyeu, we dive into the complex and rapidly shifting dynamics of Japan’s economy and why the entire world—especially investors—needs to pay close attention. Jeff Snider and guest Andre Jik unpack the unraveling of Japan’s legendary economic resilience, explaining how decades of low interest rates created a global liquidity engine now threatening to go into reverse. The conversation explores the cascading impact of Japan’s monetary moves, from the yen carry trade to the unprecedented pressures forcing Japanese wealth to return home. We break down the psychology driving economic decisions, the looming possibility of authoritarian interventions, and why changes in Japan’s bond and currency markets could send shockwaves through everything from US Treasuries to your own retirement account. Whether you’re a market watcher or just trying to understand how faraway headlines can hit your wallet, this episode builds a mental map for navigating one of the most important—and misunderstood—economic stories of our time. Quince: Free shipping and 365-day returns at https://quince.com/impactpod Whatnot: Download the Whatnot app today and get free shipping on your first order. ATT Business: Switch to AT&T Business at business.att.com http://business.att.com Ethos: Get a free quote athttps://ethos.com/impact Surfshark: Go to https://surfshark.com/TOMBor use code TOMB at checkout to get 4 extra months of Surfshark! Ketone IQ: Visit https://ketone.com/IMPACT for 30% OFF your subscription order Incogni: Take your personal data back with Incogni! Use code IMPACT at the link below and get 60% off an annual plan: https://incogni.com/impact Pique: 20% off at https://piquelife.com/impact Netsuite: For the first time ever you can try NetSuite Next for free. If your revenues are at least in the seven figures, go to https://NetSuite.ai/Theory https://netsuite.ai/Theory. Built for every industry. Ready for every boardroom. Sign up for my AI Masterclass: https://tombilyeu.com/ai-masterclass?utm_campaign=TBS-Livestream&utm_source=you https://tombilyeu.com/ai-masterclass?utm_campaign=TBS-Livestream&utm_source=youtube&utm_medium=social tube&utm_medium=social https://tombilyeu.com/ai-masterclass?utm_campaign=TBS-Livestream&utm_source=youtube&utm_medium=social Check us out wherever you get your podcasts: Spotify:https://open.spotify.com/show/1nARKz2vTIOb7gC9dusE4b?si=a8daffd2bf1f48fd Apple: https://podcasts.apple.com/us/podcast/tom-bilyeus-impact-theory/id1191775648 Do you need my help STARTING a business? Join me here inside ZERO TO FOUNDER: (https://tombilyeu.com/zero-to-founder) Get the exact systems, mindset shifts, and principles that built a $1B brand delivered straight to your inbox every week. Subscribe for free (https://tombilyeu.com) https://tombilyeu.com Check out our Video game - Project Kyzen: (https://projectkyzen.io/) https://projectkyzen.io/ Catch Me Streaming on Twitch - (https://twitch.tv/tombilyeu) Link to IT discord:https://discord.gg/TZKJ2etPbT Tom's Favorite Things List: https://amzn.to/41Ftt7e For Business inquiries: [email protected] mailto:[email protected] FOLLOW TOM: Instagram:https://www.instagram.com/tombilyeu/ Twitter:https://twitter.com/tombilyeu YouTube:https://www.youtube.com/@TomBilyeu See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

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• 2:07Speaker 00

  The situation in Japan is getting very weird. Anybody that's invested is going to need to pay very close attention to what's happening. It is a, it is a complex issue, but it is very understandable. And so we're going to go through this. We're going to take things piece by piece and really try to build a mental map for what's going on. If you guys don't already know Andre Jik, this is somebody that you're going to want to get to know. He is fantastic. He puts out really good content on very complicated topics.

• 2:35Speaker 02

  So Japan's economy is starting to break. And why that's so important to us is because all of our stock markets and all of our portfolios and 401Ks are partially built on borrowed Japanese money. And that money is being asked to come back home.

• 2:51Speaker 00

  This is like the core thesis laid out really simply. What ends up happening is you've got, post-World War II, Japan absolutely hammered, their economy is terrible. You can't imagine, research this phase of Japanese history is utterly fascinating. But they finally end up getting their feedback under them. They build up the strongest economy in the world, stronger than the US for a very brief period of time. And then they end up, just everything's going into real estate. It's so reminiscent of what's going on in China right now. And in 1989, it all comes crashing down. They, remember, the economy is a psychological game. So Japan gets their hand burned on the stove. People just get absolutely obliterated. They go from like the good times are never going to end to everybody is in dire straits.

• 3:35Speaker 00

  And it just absolutely traumatic. So what ends up happening is Japan tries to re-stimulate their economy by lowering interest rates. Now, this is where I'll remind everybody of our boy Jeff Snider over at Eurodollar, who talks about the fact that what the central banks do is a response. They're never in the lead, and nobody has proven that more than Japan. So Japan tries and tries and tries to stimulate their economy, and they can't fucking do it. No, like almost no matter, literally no matter what they try, not almost, no matter what they try, they can't spark inflation. And so they're just like making money as cheap and accessible as humanly possible. Now, the rest of the world wakes up and starts paying attention. And the rest of the world goes, aha, I'm going to get a spread.

• 4:17Speaker 00

  I'm going to get this money at almost zero interest, and I'm going to put it somewhere that yields, let's say, 4% to 5%. And they make that, that split. And so Japan, trying to reignite their own economy for, by the way, this is held for like almost 30 years, trying to reignite their own economy has created liquidity across the entire fucking globe.

• 4:38Speaker 02

  Now, there was a couple of very interesting tweets that went viral recently. And here's what they said. Quote, "The measures being prepared by the Bank of Japan will affect the lives of billions of people. To the people of the Western countries, I offer my deepest apologies. This is not a personal matter. May God's blessings be upon you." End quote. That tweet got millions of views. Now, no one really knows who this person is. The account goes by the name Yuto. It posts exclusively in Japanese. And over the last few months, they've sort of developed a reputation as someone who's somewhat of a market oracle and a Bank of Japan insider, because the things they keep posting kind of keep coming true.

• 5:20Speaker 00

  Okay, this is going to be the most internet thing that he says. I love Andre. I think he's amazing. You guys should all hit the subscribe button immediately. However, on this point, I think that a little more research will reveal to people that Yuto, while a very fascinating account, fun to follow, is very sort of internet denizen, getting people hyped. I can't remember if Andre addresses this, but I will certainly address this as we go. But there's something called Article 589, I believe. I'll get you the, the exact number as we go. But there's this article and Yuto's posting about it. And he's like, yo, you guys don't understand. Japan's got this like secret thing and Article 589.

• 6:02Speaker 00

  And it's going to come back to like basically force all the money to flow back into Japan. Okay, very cool from like an internet headline, like you guys are going to get content out of this. But on that, I will say, what's going to play out in Japan is mechanistic. They almost certainly do not have, in their current laws, I'll explain later how they could go in an authoritarian direction. But the, the Article 589, which is something that was really pushed by this Yuto guy, ends up being, when you really look at it, like meh, it's almost like 99.9999% a nothing burger. So I'm going to caveat that Yuto's probably not the guy to worry about. It, it creates a nice narrative that gets people to pay attention, says how serious this is. I don't think you need that.

• 6:45Speaker 00

  What's actually going on with the Japanese yen carry trade unwinding just based on the physics of how money works, which we're going to go through. We're going to show exactly what the physics are here. But you don't need to overplay this one. So not wanting to give into the hype, I'll say, I'm going to wildly discount Yuto's inclusion in all of this.

• 7:05Speaker 02

  So 12 days after that first post, they posted again. Quote, "Japan's wealth is returning to its homeland by any means necessary. The Bank of Japan has so decided."

• 7:17Speaker 00

  All right, real people don't talk like this, so let's start with that. Again, I think this account probably is an insider. I think they really do have deep insights. And boy, would I like to take Yuto out for a drink. But the way that they interface with the world is to be very, not clickbaity, but it's like they know how to be engaging. So take these as engagement tactics more than pointing at something truly like sort of hidden and ominous in the background. I think all of this is existing exactly on the surface.

• 7:43Speaker 02

  That post also got millions and millions of views. And then last week, they posted a third time. Quote, "Article 589"

• 7:51Speaker 00

  Here we go.

• 7:51Speaker 02

  "will be cited far more frequently than you imagine. Foreign borrowers should not assume that past approvals guarantee future funding. A warning to all borrowers who think they can continue to refinance through Japan. Article 589 is universal." End quote. I'll explain Article 589 later in the video because as these tweets were going viral.

• 8:11Speaker 00

  All right, so just speaking to Article 589 really fast, and I'll address it more when he gets there. But Article 589 is not universal. That's the thing to hold on to right now. I've looked at this. There is a research paper that came out about it, partly, I'm sure, because of this guy's tweets. So anyway, we'll address it more, but for now, just know it's not universal.

• 8:30Speaker 02

  Japan's economy started to sort of break. For example, the Japanese yen has gone down to the lowest level against the dollar in about 40 years. Japan's government bond yields, AKA their interest rates, went way up. And that usually only happens to what are called emerging markets when they're in what's called a debt crisis. This should not be happening to the world's biggest creditor country. Japan then spent 73-

• 8:56Speaker 00

  By the way, it, it is almost self-evident that this is going to happen to the world's largest creditor, given what has happened over the last six years. It is just very much not the thing you want to happen because of how systemically important they have become, Japan specifically, and the yen has become to the global liquidity pool.

• 9:17Speaker 02

  ...$3 billion defending its currency, and they increased their interest rates to levels that we haven't seen since 1995.

• 9:27Speaker 00

  All right, really fast, I'm going to speed run what it means to try to defend a currency. So what's ending up happening is the yen compared to the dollar is going down. So you get more yen per $1. That makes anything that you're buying from the US more expensive. If you're Japan and you basically import everything, that's not ideal. Okay, so one of the strategies that you have is supply and demand is what makes something go up or down in value. So if there's way more yen in the system than people want to hold, now the value of the yen is going to go down. So you try to hoover up the yen that's out there that nobody wants. And so that's what they were trying to do to defend their currency.

• 10:00Speaker 02

  But despite spending that $73 billion and raising their interest rates, it did nothing to help the yen, which is also why-

• 10:11Speaker 00

  Okay, and by the way, why raise interest rates? How does that help the yen? If the interest rates are going up, people are like, oh damn, I actually want to own Japanese debt, and so I'm going to need to get yen to buy that debt. So if you can make the debt attractive, then people will naturally need the yen to get in. So again, you're just trying to hoover up the oversupply of yen.

• 10:28Speaker 02

  They're now doing something they have never done before in the history of the modern world, which is that Japan wants its money to return back home.

• 10:40Speaker 02

  Why? Because Japan is essentially being forced to choose whether it wants to save its bond market or its currency, its money. So in this video, I'm going to try to explain what all these cryptic messages mean, like Article 589, what Japan's wealth returning home could mean, why they're passing their own stablecoin acts, and ultimately, what all this means for the United States and our own investments. So with that said, let's get into it. Hi, my name is Andre Jik. Hope you're doing well. Come for the finance and stay for Japan's economy. Now, in the nerdy world of economics, they say there's supposed to be two types of economies, but in reality, there's actually four: the developed, undeveloped, Argentina, and Japan.

• 11:24Speaker 02

  And that's because Japan has broken every rule of economics and still somehow got away with it.

• 11:31Speaker 00

  Okay, this is one of the things that I, it drives me crazy, not about Andre. This is like a lore of the economy that people say, "Never extrapolate something from Japan." I think it is absolutely critical to extrapolate something from Japan because you find out the truth of what's really going on. The thing to extrapolate from Japan is that everything in the economy is psychology. So, yes, it rides on physics of supply and demand, but supply and demand is an element of human psychology. What do people want to spend their money on? Where are they willing to put it? What do they trust? It's all human psychology. Are people spooked? Are they comfortable? All of that stuff is human psychology. And so, the culture of Japan is very different than the culture of many other countries, and so they tend to behave in a slightly different fashion.

• 12:12Speaker 00

  But, if you just map it back to Japan is either afraid, or this is Japan seeking a return, and you've got to have a place where there's real growth. All of a sudden, even though Japan may move in ways that are slightly different than other people, they are simply reflecting their psychology. And when people hand-wave Japan away, that's when I know they don't take human psychology seriously. Because they're now just trying to look at like plumbing or cash flows. They're not asking themselves, "Why does the cash flow in that way?" So I think you guys hand-wave Japan's difference away at your own peril. You need to ask, "What is the actual underlying thing that drives this?" Human psychology. And what is it about Japan that's different that'll help me map where they're likely to go?

• 12:56Speaker 02

  Japan has more government debt relative to the size of its economy than any developed country in the world. Over 200% of GDP. Basically, that means Japan has more debt than Greece when Greece collapsed, they have more debt than any country that's ever hyperinflated. So any textbook would tell you, "A country like that should have collapsed decades ago." But Japan somehow did not. Now, in the 1980s, Japan was what they called "a miracle economy." Because at one point, the land under the Imperial Palace in Tokyo was worth more than all the real estate in California.

• 13:34Speaker 02

  And then, in the early 90s, that bubble popped, and Japan went into something that no modern economy had ever experienced, which was three decades of deflation. The price of stuff did not go up, and their incomes didn't go up. So to fight it, the Bank of Japan lowered interest rates to zero, and basically left them there for 30 years. Money in Japan essentially became free to borrow. And when money's free to borrow, a 200% of debt to GDP doesn't really matter. Because the interest cost of having that debt is basically nothing.

• 14:12Speaker 00

  Okay, there's something really important that we have to add to this. So, why is Japan able to have 200, 230 debt to GDP when I've said like over and over and over that 100%, 130% debt to GDP is where, if you cross that line, within 18 months, you're going to be in open conflict, either from a revolution inside, civil war, or with another country. And I've always said, "The only thing that steps outside of that is Japan." So, this is where the psychology leads to something mechanistic. So, the psychology is, they burned their hands on the stove when the bubble crashes in 89. So now, they're like, "Dude, any money that I get, I'm going to use to pay off my debt. I don't want to take out big investments.

• 14:55Speaker 00

  I'm not going to do anything risky. However, I still need to get a return on my money." And so, Jeff Snider did a great piece on this, little too free-form for me to do reacts to it, but he's talked about this. And the thing that he was pointing out is that everybody talks about the hedge funds being the real problem in the Japan carry trade, that they're the ones that are taking that money and going out globally. He said, "Yes, they do it, but the reality is, this is really driven in terms of a volume play by the actual pensions and insurance funds in Japan itself. They're all seeking a return." Now, why does something become inflationary?

• 15:36Speaker 00

  And how does that matter with Japanese pension funds and insurance funds seeking return? The only time you get inflation is when you have more money chasing the same goods or fewer goods. And what ended up happening in Japan is, you didn't have the money chasing the goods in Japan. Because what ended up happening is, the money that people were borrowing, they weren't spending in Japan. They were going out to where they could get a better return. So as the cost of the debt went down, more money left Japan to get that return, because they couldn't get it off of Japanese debt. So now, all that money's leaving, it's competing for foreign things outside of Japan.

• 16:19Speaker 00

  So the cost of things in Japan didn't experience the inflation, and that's why they can have so much debt to GDP, because that money isn't staying local, competing for local goods and services. It's leaving and competing for things like US debt. But given how much US debt was printed, you could stop that from being inflationary. You could get that money, but you could just constantly keep printing new, new, new, new, new debt, which means that basically, you don't have more money chasing fewer goods, you have more money chasing more goods. And so, that also ends up not being inflationary. And so, that's the big deal, where the money is just leaving Japan, leaving Japan, leaving Japan, and so, until COVID hits, they don't have anything to stimulate the inflation. That's so important to understand.

• 17:01Speaker 00

  This is the part that people often gloss over, is how on earth can Japan be the one exception to this 200% debt to GDP? And because people hand-wave away Japan and just go, "Ah, you don't need to worry about that, Japan's like this anomaly," they never stop to go, "No, no, no, hold on. There is a mechanism here. What is the mechanism?" That's the mechanism. We're hitting pause for a moment, but there's plenty more ahead, so don't go anywhere.

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• 20:39Speaker 00

  Thanks for sticking around. Let's get right back into the action.

• 20:43Speaker 02

  Second reason why Japan never collapsed, which is because of who Japan owes all that money to. You see, when Greece collapsed, they owed money to foreigners. When Argentina defaulted, they owed money to foreigners. Foreigner countries, investors, they panic. When they panic, they sell their assets. And that's when it's game over for that country. But Japan owes the money to Japan. The Bank of Japan itself holds about 48% of all Japanese government bonds. So the central bank literally owns half of its own government debt. Japanese insurance companies hold another 20%, Japanese banks 14%, and the foreigners own less than 8%.

• 21:27Speaker 00

  Okay, he's daisy chaining these things in a way that risks being a little bit confusing, so I'm going to draw a line. What he's into now is of the debt that Japan has issued, it's largely owned by Japanese people. But of the money that was borrowed, that was sent out via the yen carry trade, that has left Japan. So the dollars that would have caused the inflation, that goes outward. And then the debt owners of Japanese debt that would panic, which is what he's addressing now, are Japanese people. And so they're less likely to have that same skittishness.

• 22:04Speaker 02

  While the rest of the world spent the last 20 years printing money, Japan did not. Since 2004, the US money supply grew by about 280%, Canada grew by 370%, but Japan only grew by 90. Japan was the only major economy in the world that kept its money relatively scarce and its interest rates at zero. That combination created something called the yen carry trade. Now, the yen carry trade meant if you were a hedge fund or a bank or an investor, you could borrow yen at 0% interest, convert it to dollars, you could buy basically anything in the world that paid you more than zero.

• 22:47Speaker 02

  Meaning you could buy US treasuries paying 4%, 5%, you could buy tech stocks, Bitcoin, anything you wanted. And you made free money. That's estimated to be worth trillions of dollars of investments all around the world, funded by borrowed Japanese money. So Japan was like, we want to get in on this too. So Japan took its savings overseas because for 30 years, there was nothing worth buying in Japan. Japanese pension funds, insurers, banks, households, they all shipped their money overseas to get some of that interest. And in the process, Japan became the world's biggest foreign holder of US government debt, holding something like over a trillion dollars of US treasuries.

• 23:33Speaker 02

  Japan's pension fund, for example, the GPIF, which is the biggest pension fund in the world, holds hundreds of billions of dollars in US bonds and stocks. So think about it like this. When the US borrows money, when tech stocks go up, when Bitcoin goes up, there is a strong chance that somewhere in that process, it was partially funded by Japanese money. But remember, this only works because interest rates were zero. They are no longer zero. Japan's interest rates are going up. And because of that, the economy is starting to break. Let me explain. And before I explain that, a lot of people watching are trying to figure out how to buy...

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  To learn more and start your crypto journey, go to sofi.com/andre. Thank you SoFi for sponsoring this segment, and now let's get back to it. So here's how Japan's economy is starting to break. Remember that 0% interest rates were only possible because the circumstances that Japan was in, AKA the prices in Japan never went up, which means when inflation is zero, you can keep your interest rates at zero forever because everyone's happy. The government can carry infinite debt for free, the world can continue borrowing cheap money, everyone's getting richer, and no one's complaining. Okay, so then what changed? Why did they have to raise their interest rates? It's because of something that happened in 2020.

• 25:50Speaker 02

  That was the pandemic, which led to trillions and trillions of dollars flooding the market.

• 25:55Speaker 00

  So I know I've said this before and I will say this again, people are underestimating how cataclysmic our response to COVID was. The fact that we shut down the global supply chains is absolute insanity. The fact that we money printed to high heaven is absolute insanity. And we are still experiencing the ramifications of this today. And this is man, just everybody needs to have their eyes wide open about what we consider an appropriate response to something and what we don't. The COVID response was moronic in the extreme.

• 26:28Speaker 02

  There were broken supply chains, right? Energy prices went way up, and the whole world got inflation. By 2022, Japan got 2% inflation for the first time in decades. So the Bank of Japan is like, okay, we've got some inflation. What do we do? All these other countries are raising their interest rates to fight inflation. Oh, look, the US raised interest rates to 5%, that's a lot. Europe's doing it. Canada's doing it. What do we do? I know, let's not raise our interest rates. We also have 200% of debt to GDP. Let's do nothing. Let's not rock the boat. Japan held their interest rates at zero and hoped that inflation would go away. That decision started to break their money, the yen.

• 27:11Speaker 02

  Because think about what happens when the US pays 5% on cash and Japan pays zero. What happens is money continues to flow out of the yen and into dollars. There is no demand for yen, so the strength of the yen collapses from around 110 per dollar to 150, then 160. That might continue working if the country was self-sustaining, right? But Japan almost has no natural resources of their own. They make arguably the best culture in the world, right? The best food and Pokemon cards, and I personally love Japan, but they don't make their own oil, right? They import almost all of their energy, and all of it is priced in dollars.

• 27:56Speaker 02

  So a collapsing yen means everything that Japan buys from the world gets more expensive for them, which means more inflation, which means more pressure on their yen. And all of that pressure eventually leads to the biggest change that economists thought would never happen to Japan. That change was a change to their psychology and culture. What does that mean? It means people now want a pay raise. You see, for 30 years, Japanese workers never really asked for pay raises because mostly that's a Western idea, because their prices never went up. So why would you need a pay raise?

• 28:39Speaker 02

  0% inflation froze Japan's need for pay raises. But once inflation started to happen, workers started demanding those pay raises and they started getting them. In fact, they got the biggest pay raises in over three decades. And once wages and prices start chasing each other higher, it's really hard to sort of put that genie back in the bottle. But then, things started to get worse because the world got this oil shock from the war in the Middle East, pushing energy costs even higher, and they got a new government in Tokyo that wanted to spend even more money.

• 29:18Speaker 02

  Meaning they wanted to issue more bonds, AKA more debt, at a time when they already have an insanely high debt to GDP.

• 29:27Speaker 00

  This is one of those times where I think the war in the Middle East is being used to, as a justification for... Yeah, I mean, listen, we've got to start raising rates because, I mean, look what's going on there. Japan certainly does import all of their oil, so they are way more exposed to that than the US is, no doubt. But I've said many times, my thesis on the fact that oil prices have not gone up nearly as much as people were expecting. So yeah, that's gonna be part of it, but it's gonna be a drop compared to COVID.

• 29:59Speaker 02

  So now Japan is at a crossroads. They have two options. Option number one, keep rates at zero, keep their high levels of debt manageable, and watch the yen get destroyed. Okay, watch inflation eat their retirees' savings, basically watch a country of savers get poorer every single month. That option could eventually lead to a revolution. So you have option two, increase interest rates to save the yen. Now, picking option two means that 200% of debt to GDP, that starts accruing real interest. The bond market that's been asleep for 30 years starts to wake up. The Bank of Japan, remember, owns half of those bonds. So they'll start bleeding losses on their own balance sheet.

• 30:44Speaker 02

  They need to start paying interest on their very high levels of debt. Now, there's no third option where everything stays the same way that it was before. So the option is save the currency or save the bond market. Okay, choose one. Now, what's interesting though is that Japan actually tried an option three where they increased their interest rates just a little and they intervened a lot, and they got the worst of both worlds. The yen started going down and bond yields started going way up. So both markets, their money and their bond market, broke at the same time. Let me show you what that breakage sort of looks like. First, I just want to say that this section is gonna get pretty complicated, so stick with me because at the end of it, it'll make a lot more sense.

• 31:28Speaker 02

  But let me start with their money breaking, the yen. As I'm making this video, the yen is trading at about 160-ish yen per dollar, which is also the lowest level that it's been against the dollar in about 40 years. And the last time this was happening, Ronald Reagan was president and Nintendo had just come out. Banks-

• 31:49Speaker 00

  How dare he. Nintendo's been out since the 1800s. I think he meant the Nintendo Entertainment System, but not to be pathetic. I couldn't help myself.

• 31:55Speaker 02

  It's like JP Morgan are saying that 164 yen per dollar is kinda like the magic line in the sand, where Japan will supposedly not allow the yen to fall past. As of today, we are very close to that line, and depending on when you're watching this video, it could have already crossed it. So that's how their money's breaking. But now, let's look at how their bond market's breaking. In 2022, Japan's 10-year government bond paid just a quarter of 1%, very small amount. Today, it pays about 2.7%, which is more than 10 times higher in just four years. The 30-year bond is at about 4%. And I know that those

• 32:39Speaker 02

  numbers seem small compared to US interest rates, but remember, this is a country with over 200% debt to GDP. Every one of these percentage points, applied to a debt of this size, is a huge amount of money in interest.

• 32:54Speaker 00

  Huge.

• 32:55Speaker 02

  But Japan also has a weird paradox that's happening. Last week, two things happened in Japan on the same day. The first thing that happened was inflation came in at 1.6%, which is good. It's below the Bank of Japan's 2% goal. That happened for the fifth month in a row. The second thing that happened was, the Japanese stock market went down over 2%, which is bad. That was about 30 trillion yen lost. And bond interest rates went up too, which is also bad. This is the opposite of what should be happening. Normally, when inflation comes in low, bonds typically do well, because low inflation means the central banks can relax. That's how it works in the US. But in Japan right now, inflation-

• 33:40Speaker 00

  I'm gonna say that a little bit differently. Low inflation means that if you lock in a rate with a government bond, that you're not going to end up losing money. Because what people are always protecting themselves against, if rates are going to go up, then buying a bond at the today's rate becomes less valuable, because as the rates go up, people are like, "I don't want to buy that one off you in the secondary market. You're getting less of a return than I can get on one that's being issued today, so I'm gonna go get one of those." And this actually ends up being a key part of understanding all of this part of it, is why is money leaving Japan? Why are the Japanese insurance companies, why are they sending money out? If you don't understand that, you won't understand why

• 34:25Speaker 00

  they're having such a hard time defending the yen. And that's gonna get into real opportunity, but I'll talk about that in a second. I want him to finish this.

• 34:33Speaker 02

  Inflation looks like it's under control. It's under target, but interest rates are still going higher, which is not good. Why? It's because Japan's bond market is not trading on inflation anymore. It's trading on a scarier question, which is, who's gonna be buying all these bonds?

• 34:52Speaker 00

  Correct.

• 34:53Speaker 02

  Right? The government wants to spend more, but the Bank of Japan, which is the buyer of last resort, that owns half the market, they're trying to spend less. Investors are looking at the supply, and they're demanding to be paid more to hold it, right? Because it's more risky for them. They're like, "I don't care what inflation does. Pay me more interest." This is why the world's investors are betting against Japan with huge amounts of leverage. Check this out. You're looking at 18 years of hedge fund bets on the Japanese yen. This data comes from the CFTC, which is publishing actual disclosed positions by big hedge funds. What this chart is showing us, is that when this line is above zero,

• 35:37Speaker 02

  hedge funds are betting on the yen. They think the yen will go up. When it's below zero, they're betting against it. So the lower this line goes, the more money is shorting the yen. Now, look at where we are today. We're all the way down here. Right? This is around negative 150,000 contracts. In dollar terms, it's roughly 11, 12 billion dollars of bets against the yen. But that's only what's visible. Most currency trading happens in private deals between banks that never show up in this data, so I can't show you that, because we don't have it. But this might be just the tip of the iceberg. So what they're all doing right now is they're borrowing yen, they're shorting the yen,

• 36:22Speaker 02

  because they're assuming Japan is helpless to stop this. Now, the Bank of Japan sees all this, and what are they doing about it? Well, they tried to fight it. In April and May, Japan's Ministry of Finance spent $73 billion buying their own currency, the yen. And it worked for about three weeks. The yen went up, and then it went back down again. Then in June, the Bank of Japan increased rates to 1%, and the yen went down anyway. One economist said that, "Doing this while your economy still runs on cheap money is like tapping the brakes while keeping your other foot on the gas."

• 37:03Speaker 00

  Here's an important part that people have to understand about this. Okay, so if it's true that your big problem isn't the hedge funds betting against you, your big problem is that the money is leaving Japan, because they're all pursuing returns, the problem that you run into is the way that the interest rates work in terms of spurring people wanting to own Japanese debt, is if they know that rates are likely to go up again in the future, they're not going to buy today. So you get this very counterintuitive, like inverse reaction, where you say, "Hey, we're gonna raise rates," that you would expect then people to flood in and say, "Oh, thank God. Like, finally, this is moving in the right direction. You guys are doing the thing that you need to be doing, and so I'm gonna come in and buy that debt." But instead, what people do is go, "Oh, really?

• 37:46Speaker 00

  Your rates are gonna go up? They're gonna keep going up? Fantastic. Then I'm gonna wait until I think that that phase is over, so I can get the tippy-top, because I don't want to buy somewhere on the way up." And then it keeps going up, and now my midpoint valuation ends up going down in value, because nobody wants to own that, because rates have gotten so much better. And that's where the Bank of Japan ironically is like creating a problem for themselves in this moment by raising rates, because people are gonna sit back and wait. So when you're trying to defend the yen by making sure that you hoover up all excess availability, one of the ways you're gonna do that is by trying to get people in to buy your debt. And so, they would need people to be confident that the debt isn't going to keep going up, so that they can come in, start buying that debt,

• 38:30Speaker 00

  and then stabilizing the yen. But if you don't have that, you've got a problem. And so then the bigger question becomes, why don't you have that? Why are people not confident that putting your money in Japan is the place to be? And that's where we get into the psychology around what's really going on. What's really going on is that people are seeking a real return, a risk-adjusted real return. And when you start looking at the risk that people have to take to put their money somewhere, what they're saying is, "Putting my money in Japan on a risk-adjusted basis, you guys are very up in the air right now. I don't know which way you're gonna go. I don't know if you're gonna be able to defend the currency. I don't know if enough people are gonna come in here. Also, I don't know what the

• 39:10Speaker 00

  return is gonna be. The return has been terrible in Japan for the last 30 years, so when I look at a risk-adjusted return, I'm basically anywhere other than Japan." And so, Japan is in this weird quagmire of, you've got to get people bringing money back to Japan. But the only real way to do it without force is to make sure that your economy is growing in a way where there's real risk-adjusted returns. Now, name me the hardest thing in the economic universe to do. The answer is, get a real rate of return, a real risk-adjusted rate of return. It is one of the most difficult things to do. You've gotta become the hot

• 39:52Speaker 00

  place. You've gotta be the country version of AI. You've gotta be the thing everybody's like, "Yo, I gotta be in Japan," in the way that people are like, "I gotta be in AI." It's the thing that's growing. People have to believe that Japan is the hot place to be. And so the question becomes, what are they going to do to make it the hot place to be? And right now, I don't know that Japan has an answer for that. And as long as Japan doesn't have an answer for that, they're gonna be doing this like tic-tac-y bullshit of trying to like raise rates. But again, if Jeff Snider is right, and I think that he is, that what the banks do, the central banks do, is a response to something. They're not actually leading the charge and getting somewhere. Now, they can drive inflation up in certain environments, like with COVID, by printing at a time where the available

• 40:34Speaker 00

  things to buy is going down, and injecting the cash in a way that is likely to be spent. But barring that, like actually getting real risk-adjusted rate of return is a totally different ballgame. That's about growing your economy. And so now, the question looming over all of Japan is, can they grow their economy?

• 40:50Speaker 02

  You're gonna burn through your brake pads, and the car's not gonna stop. Now Japan still has enough money for 15 more interventions of this size, but they're not using it. They're not using it because Japan has figured out you cannot defend your own currency by buying it. Every intervention is just going to feed the short sellers more fuel. So if Japan wants the yen to actually go up and strengthen, it does not need to buy the yen. All it has to do is change where the money lives. And that is why Japan's policy is for its wealth to return to its homeland.

• 41:34Speaker 02

  So there's an official word in economics for money returning back home, and it's actually called repatriation. And here's how we know it's happening. Because for the first time in a generation, Japanese bonds are actually paying something. The 30-year bond pays about 4% right now, which means for the first time in 30 years, a Japanese pension fund or insurance company can now look at a Japanese government bond and say, hey, maybe we should put our cash here instead where we get a guaranteed yield at home in my own currency with no exchange rate risk. It's making sense for Japanese money to return back home for the first time since the 80s. Now, on July 10th, the Japanese government made an announcement about this.

• 42:19Speaker 02

  The Finance Minister of Japan said she wants the GPIF. That's the Government Pension Investment Fund, which is the biggest pension fund in the world, worth $1.8 trillion, to start moving its investments away from foreign assets and into Japanese assets. Now, that fund holds roughly $230 billion of US Treasuries alone, plus hundreds of billions of dollars in US stocks. The government is like, okay, guys, time to bring it all back. And what happened then was the yen went up and their bond interest rates went down. The biggest drop in a month. That's what they want.

• 43:02Speaker 02

  So now every Japanese insurance company, and every bank, and every institution, they're watching what the government told the GPIF to do, and now they know that this is a sign of what is coming. Right? We can already see them start to move their money. Check this out. This is data from Bloomberg showing Japanese life and casualty insurance companies purchases of long-term Japanese government bonds. For most of the last two years, you can see that these bars were negative. Insurers were what's called net sellers of Japanese bonds. But look at the far right of the chart. The last bar shows the biggest buying in three years. The insurance companies just flipped from being sellers to being the biggest buyers

• 43:47Speaker 02

  in years.

• 43:48Speaker 00

  Now, if you're looking at the chart, though, you'll see that it wasn't that long ago that they bought even more than this. And the real question, there's a dark question looming over all of this, which is what is Japan going to do to compel them to buy it? Because if the real thing that people are seeking is risk-adjusted returns, real returns, real growth, and you are Japan and you're saying, hey, we've tried some things, they haven't worked, but now we're going to get the money back. And this is where we go back to that Udo tweet from the beginning, where he said, the money's going to return to Japan by any means necessary. And so now the question is, how dark is Japan willing to get? Is there going to be simple stuff like, hey, it's a real shame you didn't buy more government

• 44:32Speaker 00

  debt because now we have to audit you? Or is the government going to actually penalize? Or is the government going to go all the way to, if you're a government pension fund, you must bring your money back home no matter what, and we will legally pursue you if you don't? That's essentially the guns strategy? Are they going to go all the way to that? Because remember, the thing that these guys are actually pursuing is risk-adjusted rate of return. And if Japan is going to force them to repatriate their money and not give them a risk-adjusted rate of return, the economy's going to have a different problem, which is everybody putting their money into Japanese pensions and insurance funds aren't getting a risk-adjusted rate of return. And so now the economy is suffering from that.

• 45:14Speaker 00

  All the people playing the long game, trying to save, are being forced to save in something that is far worse than them. These are the kinds of capital controls that you see from places like China, where you've got authoritarian top-down control of the economy. So will Japan end up hurting itself trying to defend the yen? That's where this is going to get very, very interesting, very fast. But it's very high risk. This is a very high-risk strategy if they're not able to get growth.

• 45:46Speaker 02

  Now, hold on. Where are they getting the money to buy their own Treasuries then? And the answer is US Treasuries. By selling US Treasuries, they get dollars, which they convert to yen, their yen gets a buyer, and their bonds get a buyer. And the US assets, they get a seller. And this is where it becomes a US problem. Here's how all of this is connected back to the US. Remember, for decades, Japan was the most reliable customer at US bond auctions. They were the number one foreign holder of US debt. And now our biggest customer is not buying our debt. In fact, they might start selling a lot of it.

• 46:31Speaker 02

  Fewer buyers means-

• 46:32Speaker 00

  And by the way, remember that China's also selling your debt as fast as they can.

• 46:37Speaker 02

  The US has to do what to get new customers? The US has to offer higher interest rates to attract new buyers. That is partially why interest rates are expected to go up here in the US.

• 46:51Speaker 00

  Which creates a problem for us, because we also have to turn over like $9 trillion in debt this year.

• 46:55Speaker 02

  And if you look at the most important US Treasury bond, the 10-year bond, which is what sets our borrowing costs as consumers to buy things like 30-year mortgages, you'll see that right now it's paying about 4.7%, which is close to all-time highs. That's not good. Part of why that's happening is because a major foreign buyer of our debt is stepping back. So even if you might not own any Japanese assets, your mortgage rate is partially set thanks to Japan. Now, hold on. Doesn't this sort of upset the US? I think it might. That's maybe why Japan wants to build its own intelligence agency for the first time since World War II. Maybe that's nothing? Maybe that's something?

• 47:39Speaker 02

  Maybe this is why we're seeing all these cryptic tweets about apologizing to the West, right? Okay, if you're in Japan, there's a problem with your plan. Because Japan does not control what investors do with their money.

• 47:54Speaker 00

  Yet.

• 47:55Speaker 02

  So what if the money doesn't want to come home? What if foreign buyers or borrowers just keep rolling their cheap yen loans forever? Article 589 is how they'll make sure their wealth comes back home. Now, I'm not going to go too in-depth with Article 589 because there's no confirmed policy, there was no official statement, other than that anonymous account, so we should be skeptical, but Article 589 basically says, a lender cannot charge interest on a loan unless the interest was agreed to, which essentially allows Japan to have a little more control over where their money's going. So that's one way they're forcing the wealth back home. The second way they're doing it is through incentives.

• 48:38Speaker 00

  Okay, so really fast on 589, let me see if I can pull this up really fast. So if you dig into this in terms of what 589 actually is, it's related to transportation contracts and standard pre-contracts. So if you look at the official Japanese law translations, it confirms that Article 589 contains no special central bank recall powers or carry-trade reset mechanisms. That's basically the narrative that a lot of people are pushing. He's being wisely skeptical of that, and obviously this is one of the things that makes Andre great. But on that, the more closely I look at it, and I won't rule anything out because Japan

• 49:18Speaker 00

  could get totally authoritarian, but when I look at this, it's so confined to like a really specific obscure part of the economy. I don't think it gives people the play that they're thinking it gives. I have a feeling Udo is just reaching for, if he's like a super, super insider, somebody may have floated it at one point, I doubt that's going to come to fruition, or it could just be him grasping at what are some mechanisms that they could use. At the end of the day, if Japan wants to be authoritarian, they'll be authoritarian, they'll find a way to do it. They literally control the guns in their country, so there is always that option. But I think whatever pressures they put on people, 589 is a nothing burger.

• 49:58Speaker 02

  On July 20th, Japan passed something that's being called their version of America's Clarity Act.

• 50:04Speaker 00

  This is far more interesting. Remember, he's talking about incentives here. So how are you going to get people to want to bring money back?

• 50:11Speaker 02

  Which means crypto in Japan is now legally recognized as a financial asset, which also means Japanese banks can now hold those assets. Now, the crypto bros are like, "Yeah, XRP and Bitcoin's going to the moon." But why Japan is actually adopting crypto has nothing to do with trying to pump crypto. It has everything to do with incentivizing capital to return back home. And even more importantly, it's a system for them to buy back their own bonds.

• 50:44Speaker 00

  Okay, so imagine what they're trying to do in the US, I think, is basically say, "Okay, we need appetite for US debt. And so we're going to say, 'Hey, dear Tether or whoever, you guys can have these stablecoins, but they have to be backed one-to-one with dollars in US treasuries.'" So if Japan were to run something similar and say, "Hey, you guys can do things like stablecoins, but you're going to have to back them one-to-one with yen in the form of government debt."

• 51:11Speaker 02

  For example, one of the ways they've incentivized crypto is proposing tax cuts from 55%, where Japanese crypto wealth stayed offshore, down to 20%, where it might come home onto their regulated exchanges.

• 51:26Speaker 00

  Hey, look at that, lower taxes and you get more of something.

• 51:29Speaker 02

  In yen, in their tax system, right? They're giving those people an incentive to return the wealth back to Japan. But even more importantly, they are using crypto as a means to offload their debt onto the world and their own companies. How we know this is because here in the US, stablecoin companies have become some of the biggest buyers of US government debt. And Tether is an example of this, right? It's a company that is the biggest corporate owner of US treasuries, because every single digital dollar that they issue has to be backed by something safe, one-to-one, like US Treasury bonds.

• 52:10Speaker 02

  So Japan is looking at this US model, and they're like, "We gotta get in on this too." Right? So this will allow Japan's stablecoins to be backed by their own government bonds, which means now they'll have a buyer of their huge amount of debt. I hope all of that makes sense. If it doesn't, press the J button on your keyboard and watch it again. But, okay, let's say that all of this is true, and this works exactly like Japan wants it to. The yen starts going up, right? Proving all the short sellers wrong. What happens to the US? All else being equal, here's what happened to the markets when the yen got stronger throughout history. Check this out.

• 52:53Speaker 02

  You're looking at 30 years of the yen versus the dollar. The gray bars are official US recessions. And every red part here is when the yen got stronger relative to the US dollar. Here's what happened. In 1998, the yen went up 15% in just three days. What was happening at the time was a collapse of long-term capital management, which was a hedge fund blow up so big, the Federal Reserve had to organize a rescue. And at the center of that problem was an earlier version of that carry trade that was unwinding. Then in 2008, the yen goes higher all year long. That's the global financial crisis.

• 53:37Speaker 02

  Every borrowed yen bet in the world was starting to unwind. Then 2011, record yen high, peak global fear. 2016, Brexit, same thing. March 2020, COVID crash. Yen goes up while everything else in the world was being sold. Then August 2024, the Bank of Japan increased interest rates by just a little, a quarter of 1%. The yen went up, and a part of that carry trade started to unwind, and in one day, Japan's stock market went down 12%.

• 54:11Speaker 00

  By the way, the reason that the yen is going up when people panic is because they borrowed so much money in yen, they've got to pay that debt off back in yen. So they borrow in yen, but then they buy something else with US dollars, let's say. And so now, they've got the currency exchange risk. This is part of why when things get unstable, people start unwinding, because they're like, "I don't know what's going to happen, and I could end up underwater, so I don't want to be underwater, so I'm going to unwind my yen carry trade." But that means I have to buy yen. So as people buy yen to pay off their debt, there becomes competition for the available pool of yen, which makes it go up. But this is also why the yen doesn't stay elevated for very long. If you're actually looking at these bars, they're massive spikes, so they go up and they come back down. And so it's these very temporary things.

• 54:55Speaker 00

  What Japan is looking for is a nice, stable, strong currency. They want to get rid of all this jagged up and down. And that's why I say this is all going to come back to, can Japan create a risk-adjusted rate of return in Japan? If they can, everything's going to be wonderful. If they can't, they're going to have to accept that the yen is going to go down, or that they're going to have to force people to bring their money back. Force. Whether that's legally force, penalty force, or, "Hey, you're going to go to jail if you don't force." It will come with force. So that's where this could certainly get dicey.

• 55:33Speaker 02

  The worst day since 1987, and the US stock market went down 3%. Millions of people here in the US watched their portfolios lose money that day with no idea what was happening. Nothing happened in the US, but something was happening in Japan. So basically, what we know is that every single time the yen got stronger really fast, it meant that markets somewhere in the world were starting to break. Now, to be fair, the yen going up is not what causes these things to happen. It's usually the other way around. A crisis happens, the borrowed yen trade unwinds, everyone buys back yen, and the

• 56:16Speaker 02

  yen goes up really fast as everything else goes down. So the yen is kind of like a proxy, or a measure for how much global leverage there is, how much money borrowing is going on. Now, today, obviously, the yen is not going up. It's a very weak money. It's having a hard time going up, partially thanks to the world betting against them. But what makes this time so different is that in 1998, in 2008, in 2020, 2024, the yen going up was not intentional. But this time, a stronger yen is the plan. So all the things we talked about in this video, like the repatriation, the rate increases,

• 56:58Speaker 02

  Article 589, and all these rumors, all of that looks like that the goal of Japanese policy right now is to make this line go up, to make the yen stronger. What happens next is anybody's guess.

• 57:13Speaker 00

  That's our boy, Andre Jik. Man, if you guys haven't subscribed, again, do that. He's fantastic, you will love his stuff. The big thing that is going to have to be answered is just, can Japan grow? If they can't grow their economy, nobody's going to make any money, they're not the hot place to be, money's not going to return to Japan. It's that simple. And that's a part that a lot of people are overlooking, and without that solve, the only thing left is force. Right? Until next time, my friends, be legendary. Peace.

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