The Bank of Japan (BOJ) has made a major policy change. One that could affect every U.S. dollar in your bank account.
It all has to do with a central bank policy called “yield curve control.”
Without getting into the weeds, yield curve control is when a central bank buys government bonds to keep long-term interest rates low. The goal is to stimulate borrowing and encourage spending.
Japan had been implementing yield curve control since September 2016. That’s a record for any major global economy.
But that record ended on October 30.
That’s when the BOJ announced it would join the rest of the world by unwinding its yield curve control.
The end of yield curve control is good for Japanese markets. It will allow the country’s citizens to earn higher yields by investing in government bonds.
But it’s a bad move for the U.S. dollar. Below, I’ll tell you why…
Why the Japanese Are Buying Less Dollars
In September 2016, Japan instituted yield curve control to combat persistently low inflation.
Now, persistently low inflation may not sound like much a problem – since higher inflation means higher prices for people. However, low inflation is usually a sign of a weak economy and lack of consumer demand.
Under yield curve control, the BOJ’s goal was to set the 10-year yield under a hard cap of 0.25%. That meant Japanese who invested $10,000 into their own government’s debt would see a paltry $25 in yield.
Faced with no option other than low-yielding government bonds for safe income at home… The Japanese did what anyone else would do.
They looked abroad.
Smart investors simply borrowed Japanese yen at a cheap rate… and used that money to purchase higher-yielding foreign government bonds like U.S. Treasurys.
This trend generated a stream of new income for the United States.
Before yield curve control, Japanese investors were the second largest foreign holders of U.S. government debt. At the end of 2016, they held $1.09 trillion worth of it.
By the end of 2021, Japan had become the largest foreign holder of U.S. government debt – amassing a total of $1.33 trillion.
That’s a 22% increase in five years.
But as I mentioned above, the BOJ is phasing out its yield curve policy. And that spells bad news for the U.S. dollar.
Here’s why…
In January 2022, the BOJ announced it would implement a “loose” upper bound of 1% on its 10-year bond yield. Since then, it’s raised yields twice more.
Now that Japanese investors can earn some yield on their own government’s bonds… Their demand for U.S. government debt has begun to drop.
From December 2021 to September 2023, Japan’s holdings of U.S. government debt dropped by 18%.
That means the U.S. government will have to find someone else to cover the slack. And it doesn’t appear anyone is stepping up to the plate.
Demand for Dollars Will Drop Even More
Overseas investors are an important sources of demand for U.S. government debt. But they no longer have an insatiable appetite for it.
A decade ago, foreign investors (including central banks) owned about 43% of all U.S. government debt. Today, they own roughly 30%.
This drop in foreign demand couldn’t come at a worse time for the U.S.
The U.S. government has issued $18.3 trillion worth of government bonds through October of this year. That’s a 32% increase relative to 2022.
And Treasury officials forecast the government will issue 23% more debt in 2024 than it has this year.
If demand for U.S. government debt falls while that debt increases, the Treasury Department will have no choice but to offer higher rates to attract investors.
We saw this happen during two recent Treasury auctions. These are events where the government sells its newly created bonds to investors to raise funds for government spending.
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On November 8, the Treasury auctioned off $40 billion worth of 10-year notes at a yield of 4.52%. That’s higher than the pre-auction trading yield of 4.51%.
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On November 9, the Treasury auctioned off $24 billion worth of 30-year bonds at a yield of 4.77%. That’s 0.05 percentage points higher than the pre-auction yield – the biggest disparity in 12 years.
Now, 0.05 percentage points might seem like a small number. But it adds up quickly. On $100 billion worth of debt, that’s an additional $50 million of interest payments.
This is an early sign that demand for U.S. debt continues to weaken. And it could get worse.
Countries Are Reducing Their Dollar Holdings
I’m talking about de-dollarization. It’s the trend of foreign governments reducing their reliance on the U.S. dollar as a reserve currency.
Falling global demand for U.S. Treasurys is just one sign. Another is the push by some countries to end the U.S. dollar’s dominance as the world’s trading currency.
For instance, the BRICS countries (Brazil, Russia, India, China, and South Africa) have pledged to create their own common currency to reduce reliance on the dollar.
If the de-dollarization trend continues, the Federal Reserve will have no choice but to turn on the money printer to fill the void.
This will dramatically increase the money supply and fuel inflation. Higher inflation will erode the purchasing power of the dollars in your wallet.
If you want to protect the purchasing power of your wealth, you need to invest in assets that will outpace the rate of inflation.
Of course, our favorite asset to do that is bitcoin.
Unlike fiat currencies that you can print to infinity, bitcoin has a preset limit built into its code. That makes it disinflationary.
As more people realize this, we’ll see bitcoin’s price continue to rise. Already, it’s up 154% this year – making it among the best-performing assets of 2023.
And as bitcoin goes, so do the altcoins. Some of them are up even more than bitcoin this year.
Recently, Teeka held a special presentation sharing three steps to protect yourself from the erosion of the dollar’s purchasing power…
Including a model portfolio of five cryptos – bitcoin and four altcoins – that he believes could potentially 5x or 10x your money.
You can stream the presentation right here.
The only way to beat inflation is to either find some way to make a lot more income or find assets that will experience returns that will outpace the loss of the buying power of your dollars.
Those outsized returns will come from crypto assets like bitcoin.
Regards,
Michael Gross
Analyst, Palm Beach Daily