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Black Swan Strikes! Commodities Plunge Across the Board! Japan’s Rate Hike Suddenly Faces Major Uncertainty

Japan Triggers New Concerns!

　　In the afternoon, the yen suddenly surged in a straight line, with USD/JPY plunging more than 214 points at one point. Commodities including gold and silver also fell sharply across the board. The gains in the Japanese and South Korean stock markets also narrowed in the afternoon. This may be related to the Japanese government’s stance on a rate hike by its central bank.

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　　The Japanese government is reportedly supporting the Bank of Japan in raising rates sooner. According to Bloomberg, market participants said Japanese Prime Minister Sanae Takaichi supports the Bank of Japan raising rates in the near term, with the next move possibly coming in September or October. The Japanese government hopes to enhance the effectiveness of the recent joint US-Japan foreign exchange intervention. If the report is accurate, a rate hike by the Bank of Japan next month would be a highly certain event.

　　However, some experts have directly compared Japan’s current situation with the UK government bond crisis triggered by British Prime Minister Liz Truss in 2022, warning that under the current inflationary environment, the market cost of policy mistakes will arrive faster than in the past.

Japan Triggers the Latest Uncertainty

　　Last night, US inflation data lowered the probability of a Fed rate hike, yet the US Dollar Index still turned higher strongly. However, the market changed again today. The yen suddenly surged in the afternoon, with USD/JPY plunging more than 214 points at one point. Japanese government bond futures fell 9 basis points to 126.48. The linkage between the government bond and foreign exchange markets often signals changes in monetary policy.

　　According to reports, market participants said Japanese Prime Minister Sanae Takaichi supports the Bank of Japan raising rates in the near term, with the next move possibly coming in September or October. Concerns at the Bank of Japan that yen weakness is driving up prices, together with the government’s desire to enhance the effectiveness of the recent joint US-Japan foreign exchange intervention, have brought the two sides closer to agreement on the need for a near-term rate hike. The Japanese Prime Minister’s Office believes that specific monetary policy measures, including rate hikes, should be decided by the Bank of Japan, but that the central bank should work closely with the government to achieve the 2% inflation target “in a stable manner.”

　　Japan’s PPI rose 7.2% year-on-year in July and remained at elevated levels, with the three major categories of oil, chemicals, and nonferrous metals all rising. Combined with the yen’s fall to a 40-year low, this intensified imported inflation, while “inflationary bankruptcies” in the first half of the year reached a record high for the same period. The combined effects of corporate cost pressures, rising wages, and yen depreciation are intensifying, while Bank of Japan Governor Kazuo Ueda had previously signaled a September rate hike. The normalization of monetary policy may accelerate.

　　Starting around noon today, the commodities market also reacted noticeably, with major products including gold and silver plunging across the board.

　　Analysts believe that a short-term liquidity shock caused by a Japanese rate hike does indeed exist. As a core global funding currency, the yen could trigger large-scale carry-trade unwinding if rates rise, potentially causing leveraged funds to withdraw from risk assets in concentration, including nonferrous commodities such as copper and aluminum, resulting in a temporary price correction. When the yen strengthened rapidly in 2024, the Nasdaq and commodities also came under pressure simultaneously. However, from the perspective of the dollar’s dynamics, a stronger yen could cause the dollar to weaken, which would instead benefit nonferrous metals.

Japan’s “Truss Moment”?

　　In recent weeks, the yen’s sharp depreciation prompted the US and Japanese authorities to intervene jointly in the foreign exchange market in a rare move. However, Campbell, head of DoubleLine Capital’s global sovereign and emerging markets team, pointed out that this intervention was merely “treating the symptoms, not the root cause.” Japan’s real problem lies in the fundamental loosening of its fiscal policy. He further noted that Japan’s current predicament bears direct similarities to the sovereign debt crisis triggered by British Prime Minister Liz Truss in 2022, warning that in an inflationary environment, policy mistakes will invite faster and harsher market punishment, with the risks potentially spreading to other developed markets.

　　According to the BigGoFinance website, Campbell said on the latest episode of DoubleLine’s Perspectives program that the intervention was a coordinated action by the US and Japanese authorities, with the timing handled extremely precisely. US Treasury Secretary Scott Bessent acted quickly because he was concerned that if Japan were forced to sell US Treasuries to buy back yen, the selling pressure would be transmitted directly to the US Treasury market, driving up US borrowing costs. To this end, the Federal Reserve provided a repo facility allowing Japan to obtain dollars using its holdings of US Treasuries as collateral, thereby avoiding direct sales in the open market.

　　But this is only a stopgap measure. Japan’s enormous debt continues to expand, and the sustainability of its fiscal outlook remains in doubt. The yen’s depreciation and rising Japanese government bond yields are essentially a vote of no confidence from the market in Japan’s fiscal policy. During the decades-long period of low inflation or even deflation, the market was relatively tolerant of fiscal expansion. But when prices continue to rise, investors will no longer tolerate irresponsible fiscal behavior—the punishment will come swiftly and harshly.$USDJPY

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