Lots More With Brad Setser on the Yen, a New China Shock and Excavators

SPEAKER_1 (0:03)

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Joe Weisenthal (0:10)

Brad, what's going on with the Yen?

Brad Setser (0:14)

Well, there's been a bit of an intervention. The intervention took it from roughly 160 to 152, and now it is drifting back up towards, yes, like round 155 Broadly, the Yen is just really, really, really, really weak. Obviously, that's because Japanese interest rates are very low relative to US and European rates.

And the Yen reached a level where the Japanese Ministry of Finance, which has Japan's reserves, started selling dollars buying Yen to try to limit how weak it can become.

Tracy Alloway (0:47)

Joe, I got to say, I hate currencies. They are my most hated asset class.

Joe Weisenthal (0:51)

I love currencies.

Tracy Alloway (0:52)

No, because everything's relative. So it's like the Yen is down, but is it dollar strength or is it Yen weakness?

It sounds like from what Brad just said, it's more Yen weakness. But I'm sure there's someone out there who will argue that it's actually the dollar.

Joe Weisenthal (1:07)

I did a deadlift. One, two, three.

Tracy Alloway (1:10)

Hegemony. Barges.

Joe Weisenthal (1:15)

This is an after school special, except.

Tracy Alloway (1:16)

I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.

Joe Weisenthal (1:22)

Where's the best squid in pasta?

Tracy Alloway (1:24)

These are the important questions. Is it robots taking over the world?

Joe Weisenthal (1:27)

No, I think that, like, in a couple of years, the AI will do a really good job of making the Odd Lots podcast.

And people will think, I don't really need to listen to Joe and Tracy anymore. We do have.

Tracy Alloway (1:39)

Cha-ching.

Joe Weisenthal (1:42)

Welcome to Lots More, where we catch up with friends about what's going on right now.

Tracy Alloway (1:47)

Because even when Odd Lots is over, there's always lots more.

Joe Weisenthal (1:51)

And we really do have the perfect guest.

You know, we had our friend Hugh Hendry on the show just this week, and he was all telling this dollar story. But like, is there something wrong with Japan? Should we be scared? Or is this just a natural repricing due to the interest rate differential?

Brad Setser (2:11)

I mean, I don't think there's anything structurally or fundamentally wrong with Japan. I mean, Japan obviously has had difficulty generating sustained inflation over time. And the Bank of Japan is determined to kind of get inflation up this time. And so the Bank of Japan has been, you know, running a monetary policy that's a bit at odds with the policy of the Fed and the ECB. I mean, clearly this is a case of yen weakness because you can look at the yen versus the dollar or the yen versus the euro and either way it is weak.

But it has reached a level of kind of extreme weakness. In real terms, the yen is back to its levels of the early 1970s.

And so, you know, like if you think of Japan's economy in the early 1970s, that is before Japan's electronics industry took on the world, before Toyota's export wave and the globalization of Japanese automakers. It's returned Japan to a level of purchasing power that does seem a bit at odds with the underlying strength of its economy. But that's –you know, the debate is whether that's a natural consequence of interest rate differentials which are large and now there's less of an expectation that the Fed is going to cut. So the interest rate differential will persist. Or whether the yen has overshot a little bit. It's reached such an extreme level of weakness that it is divorced even from an interest rate differential that supports a weekend.

Tracy Alloway (3:45)

So we're speaking to Brad Setser, Senior Fellow at the Council on Foreign Relations and someone we like to talk to to connect a lot of different things that are going on in the world. And I'm just going to ask one more question on the yen and maybe it's sort of rephrasing Joe's question about should we be worried.

But we have seen all the talk about yen intervention recently. And since that supposed intervention, it looks like the yen is weakening again. Is that something to worry about?

Brad Setser (4:17)

I guess it depends on what you mean by worry. If you're the Ministry of Finance, you would rather that the yen sort of just stay in like a range of 150 to 154 So if you're the Ministry of Finance, I think you are worried because the yen is drifting back towards 160 or drifting back towards levels where you'd be expected to intervene again. The goal of intervention, some people argue the goal of intervention is to change the direction.