Arthur Hayes: Japanese Banks in Crisis Over Dollar-Yen Carry Trade Failures

Japanese banks, once secure in their financial strategies, are now facing severe challenges due to shifts in global monetary policies, as outlined by Bitmex co-founder Arthur Hayes in his latest blog post. These institutions are caught in a cycle of low yields and high hedging costs, which dramatically impact their operations and financial stability.

Japanese Banks Struggle With Unavoidable Losses, Navigating Tough Global Economic Waters

According to Arthur Hayes, Japanese banks have been heavily impacted by the aggressive rate hikes by the U.S. Federal Reserve, which began in earnest in 2023. Hayes points out that these banks, in pursuit of higher yields, had previously engaged in dollar-yen carry trades that are now backfiring. The resultant environment has left them grappling with the worst bond rout since the early 19th century, a situation Hayes describes with the Japanese phrase “Shikata Ga Nai” — it cannot be helped.

“Which nation’s banks’ balance sheets are most likely to be deaded by the Fed?” Hayes asks. “The Japanese banking system, of course.”

Hayes further details the struggles of these banks, noting the Federal Reserve’s rapid response to inflation in the U.S. by increasing interest rates, the fastest since the 1980s. This response has not only depressed U.S. Treasury bond prices but also exacerbated losses for those holding these assets, including Japanese banks. The fallout was immediate and severe, with notable banking failures in the U.S. that prompted a federal backstop for U.S. Treasuries in March 2023.

The Bitmex co-founder highlights the dire situation of Norinchukin Bank, Japan’s fifth-largest by deposits, which plans to offload $63 billion worth of foreign bonds, predominantly U.S. Treasuries. This move, as Hayes explains, is a direct reaction to the increasing untenability of holding these low-yield, high-cost investments. The bank’s decision reflects a broader trend among Japanese financial institutions, which are likely to face similar pressures to divest from unfavorable positions.

In his analysis, Hayes does not shy away from the broader implications of these financial maneuvers on the global economy and particularly on the cryptocurrency market. He notes that the increased liquidity, driven by actions such as those by the Bank of Japan through the use of facilities like the FIMA repo facility, could inadvertently bolster markets like bitcoin (BTC). Hayes argues that this stealthy expansion of dollar supply, intended to stabilize bond markets, may well have ripple effects that bolster speculative assets, suggesting a potential avenue for investors to consider amidst the turmoil.

“Just as many began to wonder where the next jolt of dollar liquidity would come from, the Japanese banking system dropped Origami cranes composed of crisply folded dolla bills upon the laps of crypto investors,” Hayes’ blog post concludes. “This is just another pillar of the crypto bull market. The supply of dollars must increase to maintain the current Pax Americana dollar-based filthy financial system.”

What do you think about the latest blog post from Arthur Hayes? Share your thoughts and opinions about this subject in the comments section below.

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