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Japanese Yen Intervention: Why It Matters for Gold and Silver
The Japanese yen has become the latest pressure point in a global financial system already dealing with heavy government debt, rising borrowing costs, and persistent political uncertainty.
Japan and the United States recently intervened in the foreign exchange market to support the yen. The move was unusual. For precious metals investors, it also deserves attention for reasons that go well beyond the Japanese currency itself.
Why Did the U.S. and Japan Intervene in the Yen?
Jeffrey Christian, managing partner of CPM Group, sees the intervention as another sign that strains are building beneath what has otherwise been a relatively quiet period for gold and silver.
Gold and silver prices have spent much of the summer moving sideways. That calm may be masking larger changes in currencies, sovereign debt, and global liquidity.
The yen intervention could be one of the first visible signs.
The yen has been under intense pressure.
Japanese authorities stepped into the foreign exchange market to buy yen in an effort to stabilize the currency. The United States subsequently participated in the effort, an uncommon instance of coordinated intervention between the two countries.
For Christian, the intervention itself is less important than what made it necessary.
Japan has struggled for decades with weak economic growth, an aging population, very high government debt, and an unusual monetary-policy environment. More recently, weakness in the yen has added another problem. A falling currency raises the cost of imports and can feed inflation at home.
Currency intervention attempts to interrupt that process.
But it does not address the underlying causes.
“This is a temporary bandage on a currency that is suffering from major structural issues.”
That distinction is central to CPM Group’s view.
Governments can buy or sell currencies. They can alter liquidity conditions. They can temporarily change the balance between buyers and sellers.
They cannot permanently eliminate economic imbalances through currency trading.
Why Yen Intervention Could Matter for Gold
At first glance, a government trying to support the yen may seem unrelated to the gold market.
The connection becomes clearer when the reasons for the intervention are considered.
Gold tends to attract investment when confidence in economic policy weakens or when investors become more concerned about sovereign debt, currencies, inflation, and financial stability.
The yen intervention touches several of those issues at once.
Japan is one of the world’s largest and most sophisticated economies. If authorities believe direct intervention is necessary to stabilize its currency, investors have reason to pay attention.
Christian sees the move as indicative of tightening global liquidity and growing sovereign-debt problems.
Those concerns extend well beyond Japan.
Governments around the world have accumulated enormous debts. Fiscal deficits remain large in many major economies. At the same time, interest rates are substantially higher than they were during much of the period when those debts were accumulated.
The cost of carrying that debt therefore has become more important.
For gold investors, the relevant question is not whether Japan succeeds in lifting the yen for a week or a month.
It is what the intervention says about the health of the larger financial system.
Currency Intervention Has Limits
Foreign-exchange intervention is not new.
Governments and central banks intervened heavily in currency markets during the 1970s and 1980s. Policymakers eventually learned that intervention alone could not indefinitely force a currency away from levels supported by economic fundamentals.
That lesson led major economies to put greater emphasis on policy coordination and structural economic changes.
The current effort to support the yen brings that history back into focus.
CPM Group’s concern is that intervention is being used to treat the symptom rather than the underlying condition.
Japan’s challenges cannot be solved simply by buying yen.
If monetary policy, government debt, economic growth, capital flows, and other fundamental factors continue to put downward pressure on the currency, intervention has to fight against those forces.
It can buy time.
Buying time is not the same as solving the problem.
The U.S. Treasury’s Role Makes This More Significant
The involvement of the United States makes the latest intervention especially noteworthy.
The U.S. Treasury participated in yen purchases, with euros reportedly sold to obtain yen.
That is unusual enough to attract attention on its own.
But Christian argues there is a broader issue.
Currency management does not happen in isolation. Transactions involving yen, dollars, euros, and government securities connect the world’s major financial markets. Actions designed to relieve pressure in one area can create complications somewhere else.
That matters at a time when relations among major trading partners are already strained.
It also matters because Japan is a major participant in global bond markets.
A disorderly move in the yen or Japanese government bonds has the potential to spill into other markets. U.S. Treasury yields, international capital flows, and global liquidity all can be affected.
Seen from that perspective, the intervention is not simply a Japanese story.
It is a global financial-market story.
Gold and Silver Have Been Quiet. The Risks Have Not.
The timing also matters.
Gold and silver have been relatively quiet over the past several months. Following the sharp price increases seen earlier, both metals entered a period of consolidation.
Quiet markets can create a false sense that the underlying risks have disappeared.
CPM Group does not believe they have.
Government debt remains high. Fiscal deficits remain large. Political relationships among major economies are strained. Questions surrounding currencies and monetary policy persist.
The risks that helped push gold and silver prices higher did not vanish because precious metals stopped rising for a few weeks.
Christian describes the current environment as part of a much longer development.
The financial and political strains facing the world have been building for decades. In his view, they have become substantially more severe over the past eight to twelve years.
The yen intervention is another indication of those pressures.
