Following our previous article on the Japanese yen, some of our readers expressed the wish to better understand the ins and outs of the Bank of Japan's intervention. By tackling the consequences rather than the causes of the devaluation of their national currency, the Japanese are simply trying to buy time. Admittedly, there aren't many alternatives.

To better understand the situation, it's important to take a step back. Japan's population is aging, and the birth rate is not about to change. So, for thirty years, the authorities have been trying to boost consumption through costly (and not always well-advised) investments. To finance this work and get out of deflation, the government increased its bond issues year after year.

The result has been an explosion in Japanese debt, which as a percentage of GDP has risen from 50% in the 1980s to over 260% today.

dette japan pct pib

Source: Bloomberg

Public debt servicing already accounts for almost a quarter of Japan's total expenditure, while 10-year interest rates remain below 1%, compared with 5% in the United States. Against this backdrop, it's easy to understand the dilemma facing Japanese policymakers. Raising rates from 1% to 2% would support the currency, but would double the burden of debt repayment. By "tapping" into its foreign exchange reserves to drive down the yen, Japan hopes to kill two birds with one stone: appease those speculating on the decline of their currency, while giving the Fed time to lower rates, thereby reducing the interest in the carry trade. In the meantime, the USDJPY is hovering between 151.90 and 158.30/160.35.

Elsewhere in the news, the EURUSD tested its resistance at 1.0890 (alongside the 4.33% level on the US 10-year), a level which, if breached, would pave the way for the dollar's further slide towards 1.1037.