Dollar vs. Yen: A Race to the Bottom

The troubled yen surged last week as the Fed cemented their decision to implement a huge interest rate cut as Shigeru Ishiba, an advocate for higher interest rates in Japan, won the election for Japanese Prime Minister.

The problem is, articles about the yen “surging” are generally measuring it against the US dollar, which is about to be massively devalued. The Fed’s interest rate cut, something of a declaration of victory against inflation, has arrived at a time when inflationary pressure is still far too high. Full-blown QE may even be coming next. Meanwhile, massive deficits that even the Fed is voicing concern about show no sign of stopping as an historically-contentious election season rages on. 

These factors are conspiring with many others to crash the dollar’s purchasing power. So, for now, the yen is “surging”…but it’s a bit perverse to use that term when your measuring stick is the tanking USD. Yen volatility is to be expected after ending years of ultra-low interest rate policy, bringing about dizzying instability. Looking at the monthly price of the yen versus the dollar, the exchange rate was closer to its monthly low of around 139.7 soon after its dramatic spike to over 146. 

Now it’s back up to 145, going up and down in wild fits and starts due to endless currency manipulations rather than allowing real free-market forces to decide its exchange value. When you have a central bank constantly changing the units on your measuring stick, any ability to measure true value is destroyed by erasing natural price discovery from the equation. Imagine using a tape measure to help you build a house, but every other day or week, some central authority got to redefine the size of an inch, and you never got to audit what they were doing. 

Your new home might look rather interesting as a sculptural piece, but wouldn’t be especially hospitable or stable to live in. That’s essentially what central banks are doing when they mess with interest rates and adjust the money supply according to their own capricious whims.

Dollar/Yen 1-Month Chart

But measured in terms of real money — that is, gold — both the yen and the dollar appear to be in a race to the bottom. Japan is raising rates just as central banks in most other major economies are cutting, ignoring the post-COVID inflation that they themselves created, and are about to make much worse. If the dollar seems weak now, wait until the Fed “intervenes” further in the problem its own meddling created, desperate to prevent a systemic crisis that crashes through the entire system. 

For their part, the Bank of Japan has signaled that it won’t be hiking rates again right away, realizing that even a very small series of hikes threatens to shake the yen and the broader Japanese economy. Either way, in terms of fiat, zoom out some more, and it doesn’t matter if you look at the yen or the dollar — gold’s continued rise is inevitable as long as central banks keep devaluing their currencies over the long-term.

Gold/Yen 1-Year Chart

With decades of ZIRP policy finally unwinding, the Bank of Japan is realizing the country’s economy can’t handle even slightly-above-zero interest rates without requiring multiple massive rescue operations. CPI in Japan is said to justify another rate hike when it reaches the popular 2% target. But CPI and inflation aren’t the same. CPI is an official measure based on official data, where there are endless incentives and countless ways to make the numbers look however officials want them to look. 

Real inflation is what happens in reality, and central banks and governments are determined to be disconnected from it. But nature doesn’t lie, and the citizens of these fiat-ruled countries are the ones who feel the effects of real inflation while their dear leaders cook their data to justify their decisions. 

Unfortunately, the average citizen in both Japan and the US is woefully without any physical gold to protect themselves from the nefarious tomfoolery of self-interested officialdom.