The Fiat Yen

The travails of Japan’s yen, plummeting in value even in terms of other fiat currencies, suggest a cautionary tale for America’s economy and the fate of the greenback. What afflicts Japan — soaring debt, fiscal recklessness, and lingering damage from central bank experiments like Quantitative Easing — likewise troubles America. Yet let not the Trump administration’s intervention to shore up Japan’s currency be brushed aside as a technicality.It was rather a confession of American fiscal concern. Pure and simple, the Treasury sought to forestall a move by Tokyo to sell United States Treasury debt to prop up the Japanese currency. Yet the Treasury’s own long-dated securities have themselves been losing value. On Tuesday, the 30-year Treasury bond changed hands at a price to yield 5.31 percent, highest since 2007. Higher yields mean greater government interest expense — and ultimately, for the American wage earner—higher taxes.At the moment the yen’s value is hovering around lows not seen in some 40 years. In the fall of 2011 a dollar was worth about 77 yen. Today a dollar fetches about 159 yen. In terms of gold, the yen was worth about a 200,000th of an ounce in 2021, but has since plunged to less than a 700,000th of an ounce. This pressure on the Japanese currency, a Wall Street Journal editorial notes, reflects underlying economic trouble that is hard to fix. Currency analysts are calling the yen “dirt cheap,” the Financial Times reports, an appraisal attributed to “worries over long-run inflation,” along with “fears that higher interest rates,” far from “supporting the currency, could intensify concerns about a country whose gross sovereign debt is around 200 per cent of GDP.” By contrast America’s total debt stands at some 123 percent of the gross domestic product.In both countries, though, the surging debt is a symptom of the fiat money era that has enabled governments to borrow vast sums of money and engage in monetary experiments like, say Quantitative Easing. Under the Bretton Woods gold exchange standard regime, greenbacks presented by foreign governments were convertible into gold at the rate of a 35th of an ounce. Foreign currencies were set at fixed rates in terms of the convertible dollar. The discipline of convertibility put a brake on government spending — and borrowing — while also limiting central bank creativity. Japan was a pioneer of such monetary initiatives. Confronted by the fallout of the post 1980s and 1990s asset bubble, Japan’s central bank in 2001 embraced Quantitative Easing. The program sought to stimulate growth by holding interest rates at artificially low levels while racking up vast amounts of assets.Japan’s QE predated America’s, which emerged after the 2008 financial meltdown under the Fed’s Ben Bernanke. In Japan, QE yielded only what critics call “lost decades” of minimal growth. Now investors fear that Japan’s debt could be “unsustainable,” as Société Générale’s Kit Juckes puts it, limiting Tokyo’s options. “Higher rates or yields make things worse, and so won’t stabilize the currency at all,” Mr. Juckes warns. “They need more growth.”Yet Prime Minister Sanae Takaichi’s plans to foster growth feature — take a guess — more government stimulus spending. That means more borrowing. With Japan’s debt now already twice the size of the economy, though, even the additional interest payments on the stimulus spending could prove prohibitive. Japan’s crisis speaks to the danger of today’s fiat-money fueled crisis of overspending and debt. The world waits for America.

The Fiat Yen

The Fiat Yen

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