Japan's Yen Collapse Threatens to Drag the US Down With It | Alex Krainer

In March 2022, while the yen was trading around 115 to the US dollar, I wrote that the "yen will burn to a crisp over the coming years." Four+ years (and numerous interventions) later, it takes 159.2 yen to buy one dollar, the weakest it’s been in 40 years, which is amplifying Japan’s rampant inflationary pressures. If the oil prices continue to rise, which seems likely, and if the yen continues to fall, which also seems likely, Japan could find itself in a disastrous double jeopardy.
 

 

» The predictable disintegration of Japan's fiscal and economic position is now all but inevitable. Japanese Government Bonds will collapse. The unraveling could resemble what Germany had experienced 100 years ago. «

Namely, Japan has to import about 3 million barrels of crude oil per day which, at current prices, is well in excess of $250 million/day, settled in US dollars. The higher the oil price goes, the greater Japan's demand for US dollars, and the greater the downward pressure on the yen. The lower the yen, and the higher the prices of oil and other imported goods, the more inflation Japan imports via its US dollar oil purchases.

US Sovereign Liquidity Strain: Facing weak demand that pushed 30-year yields to a 16-year high of 5.33%, the US Treasury doubled its liquidity buybacks of 10-, 20-, and 30-year bonds from $2 billion to over $4 billion per operation. By issuing short-term debt to repurchase long-term debt, the Treasury temporarily suppressed yields by 9–10 basis points.

Aggressive Japanese Capital Flight: Japan, the largest foreign holder of US debt, liquidated $26.4 billion in Treasuries in June alone (bringing holdings to $1.117 trillion) to raise funds to defend the falling yen.

Failing Currency Interventions: Despite joint US-Japan interventions pulling the yen back from 40-year lows near 164, the currency quickly erased over half those gains to trade above 159, pressuring the Bank of Japan to prepare further sales.

Systemic Risk: The alignment of Japan selling US debt to protect its currency alongside the US acting as the buyer of last resort for its own bonds indicates deep structural friction in global debt markets, deferring broader volatility across equities, real estate, and fixed income. 

Raising rates is not an option

Ordinarily, when they wish to strengthen their currency, central bankers raise interest rates. That would make Japanese financial assets more attractive to global investors, which would boost the demand for and purchases of yen. But the Bank of Japan (BOJ) can hardly afford to do that, given that it would bankrupt the Japanese government, which is leading the developed world in terms of debt-to-GDP, which currently stands at around 240%.

» As inflation accelerates, the Nikkei could continue to soar. However, the nominal gains in stocks will be more than offset by their losses in yen, still leaving investors with close to total losses in real terms. «

 Nikkei (weekly candles), July 2022 to August 2026.

Raising interest rates would also crash Japan’s financial markets and with it, Japan’s pension funds. When the BOJ raised the interest rates by only 0.25% on 31 July 2024, the Nikkei collapsed by -12.4%—its worst one-day crash since the Kobe earthquake in 1987. Currently, Japan’s debt to GDP stands at around 240%.

Sustainable market manipulation?

The answer, probably, is yes, but not this week. Given that raising interest rates is unpalatable, Japan had the option of selling its $1.1+ hoard of US Treasuries and using the proceeds to buy and prop up the yen. In fact, Japan’s Finance Minister Satsuki Katayama was anxious enough about her government's fiscal position that on July 10 she explicitly encouraged Japanese households and pension funds "to increase their investments in Japanese financial assets."

But selling US investments to buy Japanese assets would put further pressure on US interest rates, putting a squeeze on the US Government which is already in a massive fiscal bind. In fact, the US Government can be so sensitive about foreign governments selling their Treasury debt that they can regard it as an act of war. Accordingly, Ms. Katayama quickly backpedaled from her cunning plan. Instead, the US and Japan together coordinated an intervention to support the yen and relieve Japan’s inflationary pressure.
 

» The reason why even real assets turn worthless is that inflation 
indiscriminately annihilates the purchasing power in an economy. « 
The Economics of Inflation. Basis for all curves: January 1922 = 100. 

In late July, the US coordinated market operations with Japan to support the yen, which have been somewhat successful: they knocked the yen back up from its 40-year low of 164 yen to the dollar to below 156. Since then, however, the yen fell back to just under 160 yen/USD, where it is trading today.

Even when governments do it, currency rate manipulations ultimately fail: they buy a temporary respite from the accelerating collapse, but they cannot reverse the decline as they leave the structural causes of the financial imbalances intact. In the end, I believe that the yen will indeed burn to a crisp (as will the euro and the British pound) and that Japan will ultimately drag the United States with it.

We'll know it when it happens

Unfortunately, predicting the timing of all these events is out of the question. Note, my original article about Japan being the harbinger of bad things to come is over 16 years old, and its predictions are yet to unfold in full. US/Japanese joint yen rescue operation may not be over yet. Further efforts to boost the yen could be successful, especially if they trigger large-scale short covering in the markets.

Namely, global investors and traders have accumulated the largest short position on record against the yen. Panicked short-covering could give another boost to the yen in the near term, but in the end, the predictable disintegration of Japan's fiscal and economic position is now all but inevitable.

What happens next

Reiterating my earlier prediction with relation to this crisis, we can make three predictions about Japan’s economy:

► We'll see a period of stagflation (inflation+recession), the inflation part could ultimately morph into hyperinflation;
► Interest rates will continue to rise, and the price of Japanese Government Bonds will collapse. I believe that the unraveling could resemble what Germany had experienced 100 years ago;

► The Nikkei could continue to rally (for now)—as currency and debt turn worthless, equities tend to go vertical as we saw in many cases through history, including Venezuela, Zimbabwe, Argentina, Israel, and the Weimar Republic too.

Thus, as Japan's inflation accelerates, the Nikkei could continue to soar. However, the nominal gains in stocks will be more than offset by their losses in yen, still leaving investors with close to total losses in real terms. The reason why even real assets turn worthless is that inflation indiscriminately annihilates the purchasing power in an economy. When everyone’s purchasing power converges on zero, we really get the great reset: owning nothing minus being happy.

 

Quoted from:

Alex Krainer (August 17, 2026) - Japan financial tsunami barreling for the US. 

Unshakable Fearlessness | Daisetsu Teitaro Suzuki

Unshakable fearlessness as such already amounts to mastery, which, in the nature of things, is realized only by the few. 

As proof of this I shall quote a passage from the Hagakure, which dates from about the middle of the seventeenth century:

Yagyü Tajima-no-kami was a great swordsman and teacher in the art to the Shogun of the time, Tokugawa lyemitsu. One of the personal guards of the Shogun one day came to Tajima-no-kami wishing to be trained in fencing. The master said, “As I observe, you seem to be a master of fencing yourself; pray tell me to what school you belong, before we enter into the relationship of teacher and pupil.” The guardsman said, “I am ashamed to confess that I have never learned the art.”

 

“Are you going to fool me? I am teacher to the honorable Shogun himself, and I know my judging eye never fails.” “I am sorry to defy your honor, but I really know nothing.” This resolute denial on the part of the visitor made the sword master think for a while, and he finally said, “If you say so, it must be so; but still I am sure you are a master of something, though I do not know of what.”

“If you insist, I will tell you. There is one thing of which I can say I am complete master. When I was still a boy, the thought came upon me that as a Samurai I ought in no circumstances to be afraid of death, and I have grappled with the problem of death now for some years, and finally the problem of death ceased to worry me. May this be at what you hint?”

“Exactly!” exclaimed Tajima-no-kami. “That is what I mean. I am glad that I made no mistake in my judgment. For the ultimate secrets of swordsmanship also lie in being released from the thought of death. I have trained ever so many hundreds of my pupils along this line, but so far none of them really deserve the final certificate for swordsmanship. You need no technical training, you are already a master.”

Quoted from: 

Daisetsu Teitaro Suzuki (1938) - Zen Buddhism and Its Influence on Japanese Culture. 

Major Power's Military Expenditure │ 1830 - 2007

Source: OurWorldinData.

Max Roser and Mohamed Nagdy (2016) - There are two ways in which we might want to measure military spending; the first way is spending in real terms and the second is as a percentage of GDP. Military expenditure in real terms is important since the absolute level of expenditure matters for the outcome of war. The US spending 10% of its GDP fighting a war is likely to defeat a low or middle income country spending 50% or more of its GDP. Yet, military expenditure as a percentage of GDP allows us to get a handle on the priorities and ambitions of a country. The military expenditure of a country is largely determined by the whether it is at war or not. Outside of wartime, countries continue to spend substantial sums on maintaining their military capability. [Above] are two time series plots of military expenditure in real terms; the first is in thousands of 1900 UK pounds for the period 1830-1913, the second is in thousands of 2000 US dollars for the period 1914-2007. 

The UK’s military spending as a percentage of GDP in peacetime fluctuates around 2.5%, in times of war however, military spending rises dramatically. At the height of the Second World War, the UK was spending around 53% of its GDP on its military. Such a dramatic rise is consistent with the existential danger faced by the UK during the Second World War.

Demographics as Destiny

Business Insider (Nov 30, 2015) - What the size of the world's workforce will be like in a decade is well predictable, since the future workers have already been born. Demographics have long been a key determinant of potential growth rates, but the change in the global population over the next few years is unprecedented. Japan's population started to shrink in the mid-1990s and Germany's started shrinking around the year 2000, but the world's most populous country, China, is now seeing its working-age population shrink for the first time. Though the overall global population will continue to grow for some time yet, the growth of the working-age population is slowing down pretty much everywhere. That's relevant for a bundle of reasons. Around the world there will be fewer workers to support a growing number of retirees. But it also has some economists expecting significant pressure on wages.

 The sea of red and pink across the advanced world means contraction, no growth,
or slow growth. Only in a belt of the developing world (in Africa particularly)
is there any substantial expansion coming by 2020. Credits: HSBC (Nov 2015)
Enlarge

 

If employers have to fight for a group of workers that is growing more slowly, or even declining, they will need to encourage people to move, and their labour will be more valuable. Some countries, like Japan, Russia, and parts of Europe, have already entered the stage that the rest of the world is going into — and they've struggled with it. In Japan, slowing economic growth has made the county's ever-expanding pile of public debt more and more difficult to deal with, and the working-age population has already declined by 11.1% in the past 20 years. Smaller populations mean less demand and less potential output. More retirees relative to the number of working-age people means more fiscal pressure: greater expenditure on healthcare and less tax income. Globally, although working-age populations are still growing, HSBC expects global potential growth to be 0.6ppt lower per year over the next decade compared with the past decade given these demographic changes. Not great news for heavily indebted economies (see also HERE).