The U.S. economy is on recession alert, with concerns mounting over the Federal Reserve’s handling of interest rates.
However, Nigel Green, CEO of deVere Group, suggests that Japan’s economic troubles also significantly impact global markets.
Global stocks sold off on Monday, driven by fears that the Federal Reserve is either moving too slowly to cut rates or misjudging its inflation strategy.
Green highlights a potentially overlooked factor: Japan, the world’s third-largest economy, faces economic challenges.
Green notes that the Japanese yen has appreciated by approximately 8% against the U.S. dollar in recent weeks, trading at 148.84 yen per dollar.
This contrasts sharply with the yen’s earlier decline to 161.96 per dollar in July, its weakest level since December 1986.
This yen strengthening disrupts the ‘carry trade’—a strategy where investors borrow in low-interest currencies like the yen to invest in higher-yielding currencies like the U.S. dollar.
As the yen strengthens, the cost of maintaining these trades has surged, prompting a sell-off in U.S. equities as investors scramble to repay yen-denominated debts.
Green underscores that Japan’s currency fluctuations have broader implications, revealing how intertwined global financial markets have become.
The stronger yen increases borrowing costs for Japanese companies, potentially curbing their investment and growth.
This slowdown in Japanese business activity could reduce demand for U.S. exports and investments, adversely affecting American firms with Japanese ties.
Japan’s stock markets, including the Topix and Nikkei, are under pressure, with potential declines of up to 20% from recent highs.
The yen’s recent rally is fueled by expectations that the Bank of Japan will continue raising interest rates, creating a dilemma: how to control inflation without triggering a recession in Japan.
Green concludes, “While much focus is on the Federal Reserve, investors should also monitor developments in Japan.
The economic turbulence there could have substantial ripple effects across global markets.”
