Commodity and Market Prices

**SPEAKER_1** (0:02)
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**Tom Keene** (0:27)
Right now, we want to turn our attention, and we've decided we had to go to Japan. Shusuke Yamada drives the Yen for Bank of America, with wonderful academics out of the Massachusetts Institute of Technology in Stanford and joins us right now. Shusuke, are you surprised that we don't have a stronger Yen moving from 162 stronger to 158 and your key breakpoint of 155?

**Shusuke Yamada** (0:56)
Well, thanks for inviting me here. Well I think the authorities are determined to break 155 this time around. I think right now they're probably waiting for events such as NFP prints tomorrow.
But this time around I think the cost of failure is too high because they couldn't break 155 If they can't break this time, I think the market will basically assume the authorities have run out of options to defend the yen.

**Tom Keene** (1:27)
The romance of this is George Soros and a guy named Druckenmiller a few years ago, where basically the market vigilantes tell the authorities what's going to happen. Is that an ancient idea or is the market telling the authorities in Japan and for that matter the Secretary of Treasury what to do?

**Shusuke Yamada** (1:50)
Yeah, well, I think the Takaichi administration has potentially underestimated the market force up until now.
But I do think the coordination with the US basically means Japan cannot indefinitely rely on intervention because you ask someone to join your project, you have to have a goal. And that goal cannot be just to buy time for yourself, right? So I think this time around, this coordination appears to have been well prepared in advance. I think that implies the Japanese government is this time prepared to respond with a comprehensive package including faster VOJ hikes.

**Paul Sweeney** (2:40)
Shusuke, how important is it that the US worked in coordination with the Bank of Japan in this particular case?

**Shusuke Yamada** (2:49)
Well, I think it is quite important from two perspectives. One is that unilateral intervention obviously have a limit, which is the balance of FX reserves Japan hold.
But as the US joins, ultimately the US can sell the US dollar hit issues. So I think it removes a hard limit on the intervention. Secondly, I think US coordination is key because without coordination on a broader community, I don't think Japan can determine to respond with a comprehensive package because the current administration really historically believes in easy monetary policy and lose fiscal policy.

**Paul Sweeney** (3:44)
So we understand that the US. Fed sold euros to buy yen, as opposed to dollars. Does that suggest maybe their commitment isn't as great as it possibly could be?

**Shusuke Yamada** (3:57)
Yeah. I mean, I think there are two aspects, right? I mean, first of all, they didn't sell US dollar, their currency. So obviously, that could imply somewhat soft commitment at the moment.
But I think there's an alternative aspect that is because they sold euro, there is a possibility that European policy makers may have been given an autist. So this coordination could be on a broader scale, let's say, in the G7 community. We have to see, but I think the commitment could be that strong.

**Tom Keene** (4:38)
I want to get this question in because I think culturally, it's just so, so important. Our perception, Shusuke, is the large multinationals drive the bus.
This time around, in this modern age, the domestic Japanese, the small business, the people, politically and even financially, do they have more power now where they're harmed by weak yen, they're harmed by higher yields? Do they have more power than 20 or 40 years ago?

**Shusuke Yamada** (5:09)
Well, that's a tough question, but I have to say that this time, it's not all bad when it comes to what's happening in Japan. I mean, here's a fact about Japan. Since last spring, so that's when the yen started to weaken again, Japanese equity has been the best performer in the market. We've seen the biggest balance of payment surplus in Japan among the developed nations.
So I think economically or in the equity market, things are great. Japanese bank stocks have outperformed US bank stocks. So I think we're not in a recession, we're not in a debt crisis.
The weekend hurts. But I think from the public, maybe the pressure is not as strong as people think outside of Japan. And obviously, the question is why the yen has been so weak, despite good things like strong equity. And policy risk is one. But I think there is an alternative hypothesis, which is that equity has been too strong, meaning outperformance of Japanese equities has basically led to excess yen selling from foreign investors.