The BOJ’s yen-buying intervention has been described as no long-term solution despite being an unusual coordinated intervention, while concerns were raised that Japan’s fiscal stimulus and pledge to cut the consumption tax could heighten the risks.
Following the yen’s sharp decline, Japanese and U.S. authorities carried out an unusual coordinated intervention, but Bill Campbell of DoubleLine Capital described it as nothing more than a “Band-Aid applied to a larger wound.” He explained that Japan’s real problem lay in the loosening of its fiscal stance and doubts about fiscal soundness.
When Jeff Probst asked on the same program about the fundamental cause of the yen’s weakness, Campbell said the intervention was large in tactical terms but merely a temporary fix from a historical perspective. The U.S. Treasury secretary’s immediate action and the Federal Reserve’s repo proposal were explained as efforts to stabilize markets.
The double blow of a weakened fiscal anchor and a consumption-tax cut was emphasized. Concerns were raised that the shift under the Basic Policy on Economic and Fiscal Management and Reform toward stabilizing the debt-to-GDP ratio, together with the pledge to cut the consumption tax from 8% to 1%, would increase the fiscal burden.
The lesson of the Truss moment was said to be that, in an inflationary environment, failures of fiscal and monetary policy have an immediate impact on markets. Citing the turmoil in the UK gilt market and the spillover into currency depreciation, concerns were raised about contagion risks in developed markets, including the U.S. Treasury market.
As a potential channel of contagion, an impact on the U.S. Treasury market was envisaged, with concerns that Japan’s fiscal pressures could lead to selling pressure on U.S. Treasuries. Campbell urged bond investors to monitor developments in interdependent international markets.