The Week in Breakingviews: A yen for intervention
BREAKINGVIEWS-The Week in Breakingviews: A yen for intervention The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Peter Thal Larsen
LONDON, Aug 8 (Reuters Breakingviews) - Welcome back! August is usually a quiet period in financial markets. So economists and investors have spent the week puzzling over the coordinated foreign exchange intervention by the United States and Japan. Some thoughts on the strange move below. Email me your best theory. (If this newsletter was forwarded to you, sign up here to get it in your inbox every weekend.)
OPENING LINE
“Warner Bros Discovery is starring in its own M&A horror franchise. The studio behind ‘The Exorcist’ and ‘Nightmare on Elm Street’ once again faces a nasty regulatory scare, after state attorneys general sued to block its $110 billion tie-up with Paramount Skydance.”
Read more: Warner Bros’ M&A horror show has a happy side plot.
FIVE THINGS I LEARNED FROM BREAKINGVIEWS THIS WEEK
State-linked investors supplied more than 90% of Chinese private equity commitments last year. (An unreliable revenue source)
About 60% of data centre projects slated for 2027 have not yet broken ground. (Import bans hurt less)
Booze giant Diageo’s DGE.L sales in North America sank by 8% in the year to June. (Cost cutting won’t help)
India’s big banks cut headcount by up to 4% in the year to March. (AI will increase pressure)
SpaceX SPCX.O carried 80% of all mass humans put into orbit in the second quarter. (Costs need to fall)
THE SCOTT THICKENS
When governments take on foreign exchange traders they tend to end up on the losing side. Few policymakers understand this better than U.S. Treasury Secretary Scott Bessent. As a hedge fund manager he helped George Soros force a devaluation of the pound in 1992. That makes his recent decision to help prop up the Japanese yen all the more puzzling. What’s clear, though, is that U.S. financial policy is becoming increasingly unpredictable.
Economists and traders have spent the past week puzzling over the unusual coordinated intervention, which included Bessent scribbling “Buy Japanese Yen” on a cabinet notepad. Though the Japanese government is keen to avoid a disorderly devaluation, Hudson Lockett points out that the currency’s slide is a rational response to Prime Minister Sanae Takaichi’s debt-fuelled investment splurge. Bessent added to the confusion by drawing a comparison with the Asian financial crisis of the late 1990s, when other regional currencies dropped against the U.S. dollar.
All this may be part of an emerging “Bessent doctrine”, where the United States opportunistically uses tools of economic and financial power to support friendly governments. Viewed through that prism, the Japanese intervention is in line with Bessent’s public support for Argentinian President Javier Milei, and the reported discussions about a dollar swap line for the United Arab Emirates at the height of the Iran war.
Help for Japan seems to come with a few more strings attached, however. Bessent explicitly voiced his support for Bank of Japan Governor Kazuo Ueda, adding to expectations that the central bank will soon raise interest rates. The U.S. appears less enthusiastic about Takaichi’s policies, which include a plan to lower the consumption tax on food. “You could have that, or you could try to get inflation down,” one senior U.S. official told Nikkei. “If it were me, I would try to get inflation down.”
Bessent has selfish reasons to reverse the yen’s slide. If Japan dumps its vast holdings of U.S. government debt to buy its own currency, yields on Treasury bonds will rise further. This helps explain why the U.S. sold euros to buy yen, and why Bessent is keen to expand a Covid-era emergency facility which allows overseas governments to temporarily swap U.S. government debt for dollars. Doing so would allow the Japanese authorities to raise more cash without selling Treasuries. Yet Gabriel Rubin argues that this represents another encroachment onto the Federal Reserve’s territory.
The intervention has reversed the yen’s slide for now. But only a change of policy will alter the long-term direction. Bessent can keep markets guessing. Still, he understands better than most that hedge fund managers will be looking for any opportunity to test his resolve.
CHART OF THE WEEK
It’s been a long, lonely ride for big banks like HSBC HSBA.L. After more than a decade and a half in the valuation doldrums, the global lender’s share price is perking up. It now trades at the highest multiple of tangible book value since the rebound from the global financial crisis in 2009. Rising interest rates and the benefits of years of cost-cutting help. Yet as Antony Currie argues, justifying this level requires sustained and near-perfect results.
PARTING SHOT
Venture capitalists like to boast about the financial risks they take when backing startups. The initial public offering of Shein has revealed a hidden safety net. The Chinese fast-fashion retailer is going public in Hong Kong at a valuation of $30 to $40 billion, less than half the $98 billion price tag it achieved in 2022. Yet as Robyn Mak writes, the IPO filing shows that existing investors, including HSG and General Atlantic, have “downside protection” built into their stock, and that shareholders voted to extend that handout to other backers earlier this year. It’s another reason to be sceptical about so-called “risk capital”. And to take eye-popping private valuations with a very large pinch of salt.
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(Editing by George Hay; Production by Oliver Taslic)
((For previous columns by the author, Reuters customers can click on LARSEN/peter.thal.larsen@thomsonreuters.com))