The international financial market often moves in unexpected ways. It can be difficult to find answers when only looking at visible phenomena. The recent collaboration between the United States and Japan to defend the value of the yen is no exception. Many believe the U.S. stepped in to assist its ally Japan. However, financial markets operate differently from diplomacy. The most important principle in international finance is always the protection of one's own interests. This recent action is more accurately viewed as a choice made to safeguard the U.S. itself rather than support for Japan.
Recently, the yen has fallen to its lowest level in 40 years. To defend its currency, the Japanese government requires a substantial amount of dollars. The problem is that the easiest way to obtain those dollars is by selling U.S. Treasury bonds. Japan is one of the largest holders of U.S. Treasury bonds in the world. If Japan were to sell a large volume of bonds in the market, bond prices would likely drop, and long-term interest rates would surge.
A rise in long-term interest rates would place significant pressure on the U.S. economy. The cost of financing for businesses would increase, and mortgage rates would rise. The U.S. government, already grappling with a massive fiscal deficit, would also have to issue bonds at higher rates. Ultimately, Japan's currency defense could lead to instability in the U.S. financial market.
This is where the FIMA Repo (Repurchase Agreement) program introduced by the U.S. Federal Reserve comes into play. While the name may be unfamiliar, the principle is straightforward. Instead of selling U.S. Treasury bonds, Japan can use them as collateral to borrow the necessary dollars from the Federal Reserve. This allows Japan to secure dollars without liquidating its bonds, while the U.S. can prevent a flood of selling in the bond market. Although it appears to support Japan's currency defense, it actually serves as a safeguard for the U.S. Treasury market.
A key point to note is the shift in U.S. financial policy. In the past, macroeconomic policies such as interest rate adjustments or quantitative easing were central to addressing crises. Now, providing liquidity to absorb risks before market shocks occur is becoming increasingly important. The FIMA Repo is a prime example of this approach. It aims to reduce the likelihood of market disruptions rather than responding after they happen.
Of course, this program is not a panacea for all problems. U.S. long-term interest rates are influenced by numerous variables, including inflation, the Federal Reserve's monetary policy, fiscal deficits, the volume of bond issuance, and global investor demand. It cannot be assumed that the FIMA Repo alone will stabilize long-term interest rates. However, it can be expected to alleviate financial market anxiety by preventing a sudden sell-off of Treasury bonds.
This situation also has significant implications for us. South Korea is an open economy sensitive to changes in U.S. interest rates and exchange rates. If U.S. long-term interest rates fluctuate, it can alter the flow of foreign capital and impact the won-dollar exchange rate. The domestic bond and stock markets are not immune to these changes. To understand exchange rates, one must now look beyond just the foreign exchange market; it has become essential to also consider movements in the U.S. Treasury market.
This case illustrates the essence of international finance once again. While nations may speak of alliances, finance calculates interests. The reason the U.S. assisted Japan ultimately was to protect the U.S. economy and the dollar system. The reality that even a country with the world's reserve currency prioritizes the stability of its Treasury market underscores the immense power of financial markets.
International finance is always a game of foresight. One must read not only the immediate exchange rates but also the bonds behind them, the dollars behind those bonds, and the U.S. strategy behind the dollars. The FIMA Repo is not merely a liquidity provision mechanism; it represents a new defensive strategy chosen by the U.S. to maintain its financial hegemony and symbolizes the direction in which today's global financial order is moving. Only by understanding the intentions of the U.S. behind the yen can we truly grasp the flow of international finance.
* This article has been translated by AI.
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