Brad Setser on the US's Unusual Japanese Yen Intervention

**Brad Setser** (0:02)
Bloomberg Audio Studios, Podcasts, Radio, News.

**Tracy Alloway** (0:17)
Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

**Joe Weisenthal** (0:22)
And I'm Joe Weisenthal.

**Tracy Alloway** (0:23)
Joe, I think I know the answer to this question, but do you have a right to do list?

**Joe Weisenthal** (0:29)
No. Yeah.
I figure. No, no, no.

**Tracy Alloway** (0:33)
Well, I make a half-hearted attempt every day where it's like podcast recording one, podcast recording two, do the newsletter, reply to the following e-mails.

**Joe Weisenthal** (0:42)
Yeah.

**Tracy Alloway** (0:43)
But as of last week, I have seen the most epic to-do list.

**Joe Weisenthal** (0:48)
Oh, yes, yes.

**Tracy Alloway** (0:50)
Presumably, you saw this.

**Joe Weisenthal** (0:52)
Yeah, I saw the Scott Bessent to-do list. It was basically like by the end, right?

**Tracy Alloway** (0:57)
Right. So US. Treasury Secretary.

**Joe Weisenthal** (0:59)
It's pretty awesome to-do list.

**Tracy Alloway** (1:00)
Scott Bessent, there was a photo taken of him. Presumably, he did this on purpose. One would hope, but he had a to-do list, and it basically just said, buy Japanese yen, and he put in the JPY acronym.

**Joe Weisenthal** (1:14)
No ambiguity.

**Tracy Alloway** (1:15)
Five to 10 billion.

**Joe Weisenthal** (1:17)
Yeah. So it was pretty clear that he was not referring to personal purchases in some vacations.

**Tracy Alloway** (1:23)
If that's the only thing on the Treasury Secretary's to-do list, he's not that busy, right?

**Joe Weisenthal** (1:29)
He's not, but he presumably is fairly busy. We know that the yen had been weakening dramatically. We know that there has been a recent sharp strengthening. There's always talk of a yen intervention here and there. I don't really understand fully why the yen is so weak, why the US feels compelled that it's important to get involved in that market, et cetera. I have many questions.

**Tracy Alloway** (1:49)
Yeah. So the US did intervene together with Japan in the yen to stop it from weakening. And what's really interesting about all of this? I mean, we love big foreign currency stories anyway, but what's interesting is this was kind of a new type of intervention. So the US actually sold euros, which was very interesting. And they also used a Fed repo facility that I had completely forgotten about as well. So there are all these interesting questions about this particular incident, let's say, including the big one, which is, will this be enough to stop the yen weakening? And it's still very surreal to me whenever I look at a chart of the dollar exchange rate, the yen will always be 110 to the dollar for me. Because that was my allowance when I was there. I got a thousand yen every week and it was roughly $10.
And so I have that stuck in my head. And whenever I look at the chart, it's now at like 155 It's kind of crazy.

**Joe Weisenthal** (2:47)
No, it's pretty wild. I mean, for so long, for the first half of our career, the story was like strengthening and strengthening yen, lower and lower rates at the long end of the Japanese yield curve. People used to talk about the widow maker trade because many people had gone to short various forms of Japanese paper on the expectation that it'll blow up in some way. But it has already blown up, but it's been quite a reversal on both the rates in the end. And again, the question I have in addition to the tools is why is this an important thing now for the US to get involved in? Why do we feel so? I have many questions.

**Tracy Alloway** (3:22)
All right, so whenever we have big questions about capital flows or FX moves, we shine our Brad Setser bat signal into the sky, and he magically appears on the podcast. So we do, in fact, have the perfect guest. We are speaking once again with Brad Setser, Senior Fellow at the Council on Foreign Relations. So Brad, thank you so much for coming back on Odd Lots.

**Brad Setser** (3:43)
Well, it's always fun.

**Tracy Alloway** (3:44)
Maybe just to begin with, let me ask the obvious question. If your currency is weakening to the degree that you think an intervention is necessary, why doesn't the BOJ, the central bank, just raise rates?

**Brad Setser** (4:01)
That is a very obvious question.
For whatever reason, the Bank of Japan has been very slow to raise rates. The short-term policy rate is about one percent. Inflation is clearly above that. There are different measures. Inflation has been above that for a long time.
The stated reasons for the hesitation is the Bank of Japan has worked for so long to get inflation back to two. They don't want to prematurely cut off this shift in behavior to kind of, they don't want to fall back into the zero rate, zero inflation economy. I think there's also probably a few technical reasons. I'm sure that Ueda wanted the yield curve to steepen, and it has a lot before short-term rates went up. Short-term rates affect the cost of all the yen deposits. So they impact the liability side of the banking system. The banks have a lot of low-yielding assets on their balance sheet, so does the Bank of Japan. So there may be some concern about pushing up the cost of funding on the banking side too fast. The theory of some in the market, not me, is that this is out of concern about how it impacts the government's overall funding cost. And if you pushed up short-term rates, that would push up the fiscal deficit and interest costs too much. I think that's a little overstated, but that is certainly one of the considerations.