Speaker A
So, Japan's economy is starting to break. And why that's so important to us is because all of our stock markets and all of our portfolios and 401ks are partially built on borrowed Japanese money, and that money is being asked to
Japan's economy is breaking down as borrowed Japanese money returns home, impacting global markets and investments.
Ask about this video. Answers come from its transcript only — with the timestamp, so you can check them.
Generated from the transcript and can be wrong — check the timestamp.
Key Takeaways
- Japan's economic instability has global repercussions due to its role as a major creditor and financier of foreign assets.
- The yen carry trade is unwinding as Japan raises interest rates, disrupting global investment flows.
- Japan's unique debt structure has delayed collapse but is now under severe strain.
- New policies like stablecoin acts indicate Japan's efforts to stabilize its debt market.
- Investors worldwide should monitor Japan's economic shifts as they impact US markets and portfolios.
What the video covers
- Japan's economy is showing signs of collapse, affecting global stock markets and portfolios due to borrowed Japanese money being recalled.
- A mysterious Twitter account 'Uto' has predicted key Bank of Japan moves, including citing Article 589 which warns foreign borrowers.
- The Japanese yen has hit a 40-year low against the dollar, and government bond yields have surged, signaling a debt crisis.
- Japan spent $73 billion defending its currency and raised interest rates to levels unseen since 1995, but the yen continued to weaken.
- Japan faces a choice between saving its bond market or its currency, unprecedented in modern economic history.
- Japan's debt is over 200% of GDP, the highest among developed countries, yet it avoided collapse due to unique internal debt ownership.
- The Bank of Japan owns nearly half of its government bonds, with Japanese institutions holding most of the rest, limiting foreign exposure.
- Japan's zero interest rates enabled the 'yen carry trade,' where investors borrowed cheap yen to invest globally, fueling trillions in assets.
- Rising Japanese interest rates threaten this carry trade, causing economic stress and forcing Japan to repatriate wealth.
- Japan recently passed stablecoin legislation to back digital currencies with government bonds, aiming to support debt demand.
Chapters
- 00:00Introduction: Japan's Economy Breaking Down
- 01:35Viral Tweets and Article 589 Explained
- 03:22Japan's Debt and Economic Anomalies
- 05:20Who Owns Japan's Debt and Why It Matters
- 07:11Japan's Role in Global Investment and the Yen Carry Trade
- 08:38Japan's Economic Challenges and Resource Limitations
- 12:19Japan's Policy Options and Currency Impact
- 15:00Interest Rates, Inflation, and Market Reactions
- 17:32Japan's Stablecoin Act and Debt Market Support
- 19:09Market Consequences and Future Outlook
Full Transcript — Download SRT & Markdown
Speaker A
come back home. Now, there were a couple very interesting tweets that went viral recently, and here's what they said.
Speaker A
Quote, "The measures being prepared by the Bank of Japan will affect the lives of billions of people. To the people of the western countries, I offer my deepest apologies. This is not a personal matter. May God's blessings be
Speaker A
upon you." End quote. That tweet got millions of views. Now, no one really knows who this person is. The account goes by the name Uto. It posts exclusively in Japanese. And over the last few months, they've sort of
Speaker A
developed a reputation as someone who's somewhat of a market oracle and a Bank of Japan insider because the things they keep posting kind of keep coming true.
Speaker A
So 12 days after that first post, they posted again. Quote, "Japan's wealth is returning to its homeland by any means necessary. The Bank of Japan has so decided." That post also got millions and millions of views. And then last week, they
Speaker A
posted a third time. Quote, "Article 589 will be cited far more frequently than you imagine. Foreign borrowers should not assume that past approvals guarantee future funding. A warning to all borrowers who think they can continue to refinance through Japan. Article 589 is
Speaker A
universal." End quote. I'll explain article 589 later in the video because as these tweets were going viral, Japan's economy started to sort of break. For example, the Japanese yen has gone down to the lowest level against the dollar in about 40 years. Japan's
Speaker A
government bond yields, aka their interest rates, went way up, and that usually only happens to what are called emerging markets when they're in what's called a debt crisis. This should not be happening to the world's biggest creditor country. Japan then spent $73
Speaker A
billion defending its currency, and they increased their interest rates to levels that we haven't seen since 1995.
Speaker A
But despite spending that $73 billion and raising their interest rates, it did nothing to help the yen, which is also why they're now doing something they have never done before in the history of the modern world, which is that Japan
Speaker A
wants its money to return back home. Why? Because Japan is essentially being forced to choose whether it wants to save its bond market or its currency, its money. So, in this video, I'm going to try to explain what all these cryptic
Speaker A
messages mean, like article 589, what Japan's wealth returning home could mean, why they're passing their own stable coin acts, and ultimately what all this means for the United States and our own investments. So, with that said, let's get into it. Hi, my name is Andre
Speaker A
Jick. Hope you're doing well. Come for the finance and stay for Japan's economy. Now, in the nerdy world of economics, they say there's supposed to be two types of economies, but in reality, there's actually four. The developed, undeveloped, Argentina, and
Speaker A
Japan. And that's because Japan has broken every rule of economics and still somehow got away with it. Because Japan has more government debt relative to the size of its economy than any developed country in the world, over 200% of GDP.
Speaker A
Basically, that means Japan has more debt than Greece when Greece collapsed. They have more debt than any country that's ever hyperinflated. So, any textbook would tell you a country like that should have collapsed decades ago.
Speaker A
But Japan somehow did not. Now, in the 1980s, Japan was what they called a miracle economy because at one point, the land under the Imperial Palace in Tokyo was worth more than all the real estate in California. And then in the early
Speaker A
'90s, that bubble popped and Japan went into something that no modern economy had ever experienced, which was three decades of deflation. The price of stuff did not go up and their incomes didn't go up. So to fight it, the Bank of Japan
Speaker A
lowered interest rates to zero and basically left them there for 30 years. Money in Japan essentially became free to borrow. And when money's free to borrow, a 200% of debt to GDP doesn't really matter because the interest cost
Speaker A
of having that debt is basically nothing. Now, there's a second reason why Japan never collapsed, which is because of who Japan owes all that money to. You see, when Greece collapsed, they owed money to foreigners. When Argentina defaulted, they owed money to
Speaker A
foreigners. Foreign countries and investors, they panic. When they panic, they sell their assets, and that's when it's game over for that country. But Japan owes the money to Japan. The Bank of Japan itself holds about 48% of all Japanese government bonds. So the
Speaker A
central bank literally owns half of its own government debt. Japanese insurance companies hold another 20%, Japanese banks 14%, and the foreigners own less than 8%. Now, here's why that's so important to Western nations. While the rest of the world spent the last 20
Speaker A
years printing money, Japan did not. Since 2004, the US money supply grew by about 280%.
Speaker A
Canada grew by 370%. But Japan only grew by 90%. Japan was the only major economy in the world that kept its money relatively scarce and its interest rates at zero. That combination created something called the yen carry trade. Now the yen carry trade meant if
Speaker A
you were a hedge fund or a bank or an investor, you could borrow yen at 0% interest, convert it to dollars, you could buy basically anything in the world that paid you more than zero.
Speaker A
Meaning you could buy US treasuries paying four to 5%. You could buy tech stocks, Bitcoin, anything you wanted, and you made free money. That's estimated to be worth trillions of dollars of investments all around the world funded by borrowed Japanese money. So Japan was
Speaker A
like, we want to get in on this too. So Japan took its savings overseas because for 30 years there was nothing worth buying in Japan. Japanese pension funds, insurers, banks, households, they all shipped their money overseas to get some
Speaker A
of that interest. And in the process, Japan became the world's biggest foreign holder of US government debt, holding something like over a trillion dollars of US treasuries. Japan's pension fund, for example, the GPIF, which is the biggest pension fund in the world, holds
Speaker A
hundreds of billions of dollars in US bonds and stocks. So, think about it like this. When the US borrows money, when tech stocks go up, when Bitcoin goes up, there is a strong chance that somewhere in that process, it was
Speaker A
partially funded by Japanese money. But remember, this only works because interest rates were zero. They are no longer zero. Japan's interest rates are going up. And because of that, the economy is starting to break. Let me explain. Now, before I explain that, a
Speaker A
lot of people watching are trying to figure out how to buy, sell, and hold crypto without jumping through a bunch of hoops or worrying about sketchy platforms. And that's where SoFi comes in. SoFi Crypto is back. And what's
Speaker A
interesting is they're the first national chartered bank where retail customers can buy, sell, and hold over 25 cryptocurrencies. And that means you can access assets like Bitcoin, Ethereum, and Solana on a federally regulated platform with the safeguards of a bank all inside the same app as
Speaker A
your checking, savings, and investing. So, it's everything in one place. Now, obviously, crypto is inherently risky and you need to make sure that it's right for your financial situation. But if you're someone who wants exposure to crypto within a platform that operates
Speaker A
under a national bank charter, that's a big deal. You can open an account using my link down below. I'll also have the link at the top of the description of this video, so it's easy to find as well. To learn more and start your
Speaker A
crypto journey, go to sofi.com/andre. Thank you, SoFi, for sponsoring this segment. And now, let's get back to it.
Speaker A
So, here's how Japan's economy is start
Speaker A
forever because everyone's happy. The government can carry infinite debt for free. the world could continue borrowing cheap money. Everyone's getting richer and no one's complaining. Okay, so then what changed? Why did they have to raise their interest rates? It's because of
Speaker A
something that happened in 2020. That was the pandemic which led to trillions and trillions of dollars flooding the market. There were broken supply chains, right? Energy prices went way up and the whole world got inflation. By 2022, Japan got 2% inflation for the first
Speaker A
time in decades. So, the Bank of Japan is like, "Okay, we've got some inflation. What do we do?" All these other countries are raising their interest rates to fight inflation. Oh, look, the US raised interest rates to 5%. That's a lot. Europe's doing it.
Speaker A
Canada's doing it. What do we do? I know. Let's not raise interest rates. We also have 200% of debt to GDP. Let's do nothing. Let's not rock the boat.
Speaker A
Japan held their interest rates at zero and hoped that inflation would go away. That decision started to break their money, the yen. Cuz think about what happens when the US pays 5% on cash and Japan pays zero. What happens is money
Speaker A
continues to flow out of the yen and into dollars. There is no demand for yen. So the strength of the yen collapses from around 110 per dollar to 150 then 160. That might continue working if the country was self-
Speaker A
sustaining, right? But Japan almost has no natural resources of their own. They make arguably the best culture in the world, right? The best food and Pokémon cards. And I personally love Japan, but they don't make their own oil, right?
Speaker A
They import almost all of their energy and all of it is priced in dollars. So a collapsing yen means everything that Japan buys from the world gets more expensive for them, which means more inflation, which means more pressure on
Speaker A
their yen. And all of that pressure eventually leads to the biggest change that economists thought would never happen to Japan. That change was a change to their psychology and culture.
Speaker A
What does that mean? It means people now want a pay raise. You see, for 30 years, Japanese workers never really asked for payraises because mostly that's a western idea because their prices never went up. So why would you need a pay
Speaker A
raise? 0% inflation froze Japan's need for payraises. But once inflation started to happen, workers started demanding those payraises and they started getting them. In fact, they got the biggest payraises in over three decades. And once wages and prices start
Speaker A
chasing each other higher, it's really hard to sort of put that genie back in the bottle. But then things started to get worse because the world got this oil shock from the war in the Middle East, pushing energy costs even higher. And
Speaker A
they got a new government in Tokyo that wanted to spend even more money, meaning they wanted to issue more bonds, aka more debt, at a time when they already have an insanely high debt to GDP. So now Japan is at a crossroads. They have
Speaker A
two options. Option number one, keep rates at zero, keep their high levels of debt manageable, and watch the yen get destroyed. Okay? Watch inflation eat the retirees savings. Basically, watch a country of savers get poorer every single month. That option could
Speaker A
eventually lead to a revolution. So, you have option two, increase interest rates to save the yen. Now picking option two means that 200% of debt to GDP that starts acrewing real interest. The bond market that's been asleep for 30 years
Speaker A
starts to wake up. The Bank of Japan, remember, owns half of those bonds. So they'll start bleeding losses on their own balance sheet. They need to start paying interest on their very high levels of debt. Now there's no third
Speaker A
option where everything stays the same way that it was before. So the option is save the currency or save the bond market. Okay, choose one. Now what's interesting though is that Japan actually tried an option three where they increased their interest rates just
Speaker A
a little and they intervened a lot and they got the worst of both worlds. The yen started going down and bond yields started going way up. So both markets, their money and their bond market broke at the same time. Let me show you what
Speaker A
that breakage sort of looks like. First, I just want to say that this section is going to get pretty complicated, so stick with me because at the end of it, it'll make a lot more sense. But let me
Speaker A
start with their money breaking, the yen. As I'm making this video, the yen is trading at about 160ish yen per dollar, which is also the lowest level that it's been against the dollar in about 40 years. And the last time this
Speaker A
was happening, Ronald Reagan was president and Nintendo had just come out. Banks like JP Morgan are saying that 164 yen per dollar is kind of like a magic line in the sand where Japan will supposedly not allow the yen to
Speaker A
fall past. As of today, we are very close to that line and depending on when you're watching this video, it could have already crossed it. So, that's how their money is breaking. But now, let's look at how their bond market's
Speaker A
breaking. In 2022, Japan's 10-year government bond paid just a quarter of 1%. Very small amount. Today, it pays about 2.7%, which is more than 10 times higher in just 4 years. The 30-year bond is at about 4%. And I know that those numbers
Speaker A
seem small compared to US interest rates, but remember, this is a country with over 200% debt to GDP. Every one of these percentage points applied to a debt of this size is a huge amount of money in interest. But Japan also has a
Speaker A
weird paradox that's happening. Last week, two things happened in Japan on the same day. The first thing that happened was inflation came in at 1.6%.
Speaker A
Which is good. It's below the Bank of Japan's 2% goal. That happened for the fifth month in a row. The second thing that happened was the Japanese stock market went down over 2%. Which is bad.
Speaker A
That was about 30 trillion yen lost. And bond interest rates went up too, which is also bad. This is the opposite of what should be happening. Normally, when inflation comes in low, bonds typically do well cuz low inflation means the
Speaker A
central banks can relax. That's how it works in the US. But in Japan right now, inflation looks like it's under control. It's under target, but interest rates are still going higher, which is not good.
Speaker A
Why? It's because Japan's bond market is not trading on inflation anymore. It's trading on a scarier question, which is who's going to be buying all these bonds, right? The government wants to spend more, but the Bank of Japan, which
Speaker A
is a buyer of last resort that owns half the market, they're trying to spend less. investors are looking at the supply and they're demanding to be paid more to hold it, right? Because it's more risky for them. They're like, "I
Speaker A
don't care what inflation does. Pay me more interest." This is why the world's investors are betting against Japan with huge amounts of leverage. Check this out. You're looking at 18 years of hedge fund bets on the Japanese yen. This data
Speaker A
comes from the CFTC, which is publishing actual disclosed positions by big hedge funds. What this chart is showing us is that when this line is above zero, hedge funds are betting on the yen. They think the yen will go up. When it's below
Speaker A
zero, they're betting against it. So, the lower this line goes, the more money is shorting the yen. Now, look at where we are today. We're all the way down here, right? This is around -150,000 contracts. In dollar terms, it's roughly
Speaker A
11 12 billion of bets against the yen, but that's only what's visible. Most currency trading happens in private deals between banks that never show up in this data. So, I can't show you that cuz we don't have it, but this might be
Speaker A
just the tip of the iceberg. So, what they're all doing right now is they're borrowing yen. They're shorting the yen because they're assuming Japan is helpless to stop this. Now, the Bank of Japan sees all this, and what are they
Speaker A
doing about it? Well, they tried to fight it. In April and May, Japan's Ministry of Finance spent $73 billion buying their own currency, the yen. And it worked for about 3 weeks. The yen went up and then it went back down
Speaker A
again. Then in June, the Bank of Japan increased rates to 1% and the yen went down. Anyway, one economist said that doing this while your economy still runs on cheap money is like tapping the brakes while keeping your other foot on
Speaker A
the gas. You're going to burn through your brake pads and the car is not going to stop. Now, Japan still has enough money for 15 more interventions of this size, but they're not using it. They're not using it because Japan has figured
Speaker A
out you cannot defend your own currency by buying it. every intervention is just going to feed the short sellers more fuel. So if Japan wants the yen to actually go up and strengthen, it does not need to buy the yen. All it has to
Speaker A
do is change where the money lives. And that is why Japan's policy is for its wealth to return to its homeland. So, there's an official word in economics for money returning back home, and it's actually called repatriation. And here's
Speaker A
how we know it's happening. Because for the first time in a generation, Japanese bonds are actually paying something. The 30-year bond pays about 4% right now.
Speaker A
Which means for the first time in 30 years, a Japanese pension fund or insurance company can now look at a Japanese government bond and say, "Hey, maybe we should put our cash here instead where we get a guaranteed yield
Speaker A
at home in my own currency with no exchange rate risk. It's making sense for Japanese money to return back home for the first time since the 80s." Now, on July 10th, the Japanese government made an announcement about this. The
Speaker A
finance minister of Japan said she wants the GPIF, that's the government pension investment fund, which is the biggest pension fund in the world, worth $1.8 trillion, to start moving its investments away from foreign assets and into Japanese assets.
Speaker A
Now, that fund holds roughly $230 billion of US treasuries alone, plus hundreds of billions of dollars in US stocks. The government is like, "Okay, guys, time to bring it all back." And what happened then was the yen went up
Speaker A
and their bond interest rates went down. The biggest drop in a month. That's what they want. So now every Japanese insurance company and every bank and every institution, they're watching what the government told the GPIF to do. And
Speaker A
now they know that this is a sign of what is coming, right? We can already see them start to move their money.
Speaker A
Check this out. This is data from Bloomberg showing Japanese life and casualty insurance companies purchases of long-term Japanese government bonds.
Speaker A
For most of the last two years, you can see that these bars were negative.
Speaker A
Insurers were what's called net sellers of Japanese bonds. But look at the far right of the chart. The last bar shows the biggest buying in 3 years. The insurance companies just flipped from being sellers to being the biggest
Speaker A
buyers in years. Now hold on. Where are they getting the money to buy their own treasuries then? And the answer is US treasuries. By selling US treasuries, they get dollars which they convert to yen, their yen gets a buyer and their
Speaker A
bonds get a buyer. And the US assets, they get a seller. And this is where it becomes a US problem. Here is how all of this is connected back to the US.
Speaker A
Remember, for decades, Japan was the most reliable customer at US bond auctions. They were the number one foreign holder of US debt. And now our biggest customer is not buying our debt.
Speaker A
In fact, they might start selling a lot of it. Fewer buyers means the US has to do what? To get new customers. The US has to offer higher interest rates to attract new buyers. That is partially why interest rates are expected to go up
Speaker A
here in the US. And if you look at the most important US Treasury bond, the 10-year bond, which is what sets our borrowing costs as consumers to buy things like 30-year mortgages, you'll see that right now it's paying about
Speaker A
4.7%. Which is close to all-time highs. That's not good. Part of why that's happening is because a major foreign buyer of our debt is stepping back. So, even if you might not own any Japanese assets, your mortgage rate is partially set thanks to
Speaker A
Japan. Now, hold on. Doesn't this sort of upset the US? I think it might.
Speaker A
That's maybe why Japan wants to build its own intelligence agency for the first time since World War II. Maybe that's nothing. Maybe that's something.
Speaker A
Maybe this is why we're seeing all these cryptic tweets about apologizing to the West, right? Okay. If you're in Japan, there's a problem with your plan because Japan does not control what investors do with their money. So, what if the money
Speaker A
doesn't want to come home? What if foreign buyers or borrowers just keep rolling their cheap yen loans forever?
Speaker A
Article 589 is how they'll make sure their wealth comes back home. Now, I'm not going to go too ind depth with article 589 cuz there's no confirmed policy. There was no official statement other than that anonymous account, so we
Speaker A
should be skeptical. But article 589 basically says a lender cannot charge interest on a loan unless the interest was agreed to, which essentially allows Japan to have a little more control over where their money is going. So that's
Speaker A
one way they're forcing the wealth back home. The second way they're doing it is through incentives. And that is why on July 20th, Japan passed something that's being called their version of America's Clarity Act, which means crypto in Japan
Speaker A
is now legally recognized as a financial asset, which also means Japanese banks can now hold those assets. Now, the crypto bros are like, "Yeah, XRP and Bitcoin's going to the moon, but why Japan is actually adopting crypto has
Speaker A
nothing to do with trying to pump crypto. It has everything to do with incentivizing capital to return back home. And even more importantly, it's a system for them to buy back their own bonds. For example, one of the ways
Speaker A
they've incentivized crypto is proposing tax cuts from 55% where Japanese crypto wealth stayed offshore down to 20% where it might come home onto their regulated exchanges in yen in their tax system. Right? They're giving those people an incentive to
Speaker A
return the wealth back to Japan. But even more importantly, they are using crypto as a means to offload their debt onto the world and their own companies.
Speaker A
How we know this is because here in the US, stable coin companies have become some of the biggest buyers of US government debt. And Tether is an example of this, right? It's a company that is the biggest corporate owner of
Speaker A
US treasuries because every single digital dollar that they issue has to be backed by something safe one to one like US treasury bonds. So Japan is looking at this US model and they're like yeah we got to get in on this too, right? So,
Speaker A
this will allow Japan's stable coins to be backed by their own government bonds, which means now they'll have a buyer of their huge amount of debt. I hope all that makes sense. If it doesn't, press the J button on your keyboard and watch
Speaker A
it again. But, okay, let's say that all of this is true and this works exactly like Japan wants it to. The yen starts going up, right? Proving all the short sellers wrong. What happens to the US?
Speaker A
All else being equal, here's what happened to the markets when the yen got stronger throughout history. Check this out. You're looking at 30 years of the yen versus the dollar. The gray bars are official US recessions. And every red
Speaker A
part here is when the yen got stronger relative to the US dollar. Here's what happened. In 1998, the yen went up 15% in just 3 days. What was happening at the time was a collapse of long-term capital management, which
Speaker A
was a hedge fund blow up so big the Federal Reserve had to organize a rescue. And at the center of that problem was an earlier version of that carry trade that was unwinding. Then in 2008, the yen goes higher all year long.
Speaker A
That's the global financial crisis. Every borrowed yen bet in the world was starting to unwind. Then 2011, record yen high peak global fear. 2016 Brexit, same thing. March 2020, COVID crash. Yen goes up while everything else in the
Speaker A
world was being sold. Then August 2024, the Bank of Japan increased interest rates by just a little, a quarter of 1%.
Speaker A
The yen went up and a part of that carry trade started to unwind. And in one day, Japan's stock market went down 12%. the worst day since 1987 and the US stock market went down 3%.
Speaker A
Millions of people here in the US watched their portfolios lose money that day with no idea what was happening.
Speaker A
Nothing happened in the US, but something was happening in Japan. So basically what we know is that every single time the yen got stronger really fast, it meant that markets somewhere in the world were starting to break. Now,
Speaker A
to be fair, the yen going up is not what causes these things to happen. It's usually the other way around. A crisis happens, the borrowed yen trade unwinds, everyone buys back yen, and the yen goes up really fast as everything else goes
Speaker A
down. So, the yen is kind of like a proxy or a measure for how much global leverage there is, how much money borrowing is going on. Now, today, obviously, the yen is not going up. It's a very weak money. It's having a hard
Speaker A
time going up partially thanks to the world betting against them. But what makes this time so different is that in 1998, in 2008, in 2020, 2024, the yen going up was not intentional. But this time, a stronger yen is the plan. So all
Speaker A
the things we talked about in this video like the repatriation, the rate increases, article 589 and all these rumors, all of that looks like that the goal of Japanese policy right now is to make this line go up, to make the yen
Speaker A
stronger. What happens next is anybody's guess. If you're interested in seeing how I'm preparing and more of my thoughts about the economy, those videos live in the premium member section where you'll also get access to my main videos
Speaker A
earlier. If that is valuable to you, the link is down below. And don't forget to deposit $100 with Weeble to grab your 12 free stocks. Thank you for watching this very long and complicated video. I hope you have a wonderful rest of your day.
Speaker A
Smash the like button, subscribe if you haven't already. I'd love to see you back here next time. Take care. Sh.
Topics:Japan economyBank of Japanyen carry tradeJapanese yengovernment bondsArticle 589stablecoinglobal marketsinterest rateseconomic crisis
