Japan Just Put the Dollar in Serious Danger (Here’s What Happens Next)

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The Bank of Japan's recent interest rate hike to 1.25%, the highest since 1995, has created a divergence in policy with other major economies. This is occurring against the backdrop of Japan's unique 'lost decades' characterized by deflation and near-zero interest rates. Despite the BoJ's move, the Yen weakened significantly, trading above 157 against the USD. This is attributed to a dovish split within the BoJ, with two members dissenting, and a lack of commitment to further hikes. The significant holding of US Treasuries by Japan, coupled with rising US yields, presents a complex situation. As Japanese yields potentially rise, the incentive for Japanese investors to buy US Treasuries could decrease, potentially leading to capital repatriation. The current divergence between Japanese and US yields, with US 10-year Treasuries yielding above 5.28% and 30-year yields at 5.63%, while Japanese yields are kept low, suggests a currency battle. The recent coordinated intervention by the US and Japan to support the Yen indicates a significant concern about its weakness. The failure of the Yen to strengthen despite the rate hike signals underlying economic pressures and potential future volatility.

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