The Fragile Yen and Why Global Markets Are on Edge

A shaky Japanese currency is keeping the whole world of finance on its toes, according to Wall Street veteran Ed Yardeni. He recently said the global financial system looks a lot like a giant Jenga tower, with the yen acting as one of the most important pieces holding everything up. The U.S. Treasury Department stepped in alongside Japan to try to steady things. Reports suggest the U.S. may have spent somewhere between $5 billion and $10 billion buying yen, while Japan reportedly moved more than $50 billion. That helped push the exchange rate to around 157 yen per dollar from almost 164, though it later slipped back to roughly 159 by Friday.

Many experts, though, believe these moves were only a short fix. Japan is sitting on debt that tops 200% of its economy, and the government keeps spending more, which makes the problem worse. At the same time, the Bank of Japan has been slow to raise interest rates even though prices have been climbing. That mix of big debt, loose spending, and cautious central banking has been pulling the yen down for a while.

Another concern is how the rescue was carried out. The U.S. reportedly sold euros, not dollars, to buy yen, and Japan borrowed against its Treasury holdings rather than selling them off. That approach raised questions about the dollar’s role in the world and showed real worry in Washington about what a falling yen could do to America’s own debt problem. Japan holds over $1 trillion in U.S. Treasuries, more than any other country. If even some of that gets sold off, U.S. borrowing costs could climb higher, squeezing the federal budget even more. Other Asian nations hold U.S. debt too, though Yardeni pointed out their economies are in much better shape than they were during the 1998 Asian financial crisis. Still, the danger has not gone away.

Even after news of cooler U.S. inflation, which usually makes the dollar weaker, the yen failed to bounce back. Robin Brooks, a senior fellow at the Brookings Institution, said this is a worrying sign. He believes Japan needs to do much more than small interest rate increases. Instead, the Bank of Japan should pull back on its heavy bond-buying program so that long-term Japanese bond yields can rise. That would narrow the gap with U.S. yields, which has been pushing the yen lower for months. Without that kind of bigger shift, Brooks warned, the yen’s troubles are far from over, and the Jenga tower could get a lot harder to keep standing.