Research Summary
The report discusses the impact of the US Federal Reserve’s monetary policies on Japanese banks, particularly their engagement in a dollar-yen carry trade. It highlights the potential for the Bank of Japan (BOJ) to use the Federal Reserve’s Foreign and International Monetary Authorities (FIMA) repo facility to absorb the supply of US Treasury bonds, thereby preventing a spike in yields.
Key Takeaways
Japanese Banks and the Dollar-Yen Carry Trade
- Engagement in Carry Trade: Japanese banks, seeking higher yields on their yen deposits, have engaged in a dollar-yen carry trade. They borrowed domestically, found near-zero yields on safe Japanese bonds, and opted to lend to the US via the US Treasury market, which offered higher yields.
- Impact of US Inflation: The rise of inflation in the US led to the Federal Reserve raising interest rates, negatively impacting those holding US Treasury bonds. This situation has led to significant losses for Japanese banks.
Role of the Bank of Japan
- BOJ’s Potential Intervention: The report suggests that the Bank of Japan (BOJ) could use the Federal Reserve’s FIMA repo facility to absorb the supply of US Treasury bonds from Japanese banks, preventing a potential spike in yields.
- BOJ’s Risk Absorption: By buying the bonds from Japanese banks, the BOJ would take on the duration risk of the bonds. However, as a quasi-government entity, the BOJ can withstand unrealised losses and does not have to adhere to capital adequacy ratios.
Implications for the Crypto Market
- Bitcoin’s Performance: The report notes that Bitcoin’s value increased significantly following the announcement of a bailout for US banks. It suggests that an increase in dollar liquidity could further boost the crypto market.
- Transition to Crypto Risk: The author expresses confidence in transitioning from staked USD to crypto risk, given the potential for increased dollar liquidity.
Actionable Insights
- Monitor FIMA Repo Facility: Keep an eye on the use of the FIMA repo facility by the BOJ. An increase in its use could indicate an increase in dollar liquidity, which could impact the crypto market.
- Assess Impact on Crypto Market: Consider the potential impact of increased dollar liquidity on the crypto market. The report suggests that this could boost the value of cryptocurrencies.
- Consider Currency Risk: Be aware of the currency risk associated with foreign investments. The report highlights how Japanese banks have been negatively impacted by their exposure to US Treasury bonds.
