U.S. Fiscal Policy and the Japanese Banking Crisis: New Challenges in the Global Financial Market

Against the backdrop of global economic turmoil and fluctuations in financial markets, the Japanese banking system is facing unprecedented challenges. The Federal Reserve's interest rate hike cycle, along with the fiscal and monetary policies of the United States, has had a profound impact on global markets, with the Japanese banking sector being the first to bear the brunt.

Recently, Japan's fifth largest bank announced that it will sell foreign bonds worth $63 billion, most of which are U.S. Treasury bonds. This decision stems from the rise in interest rates in the U.S. and Europe, which has led to a decline in bond prices, causing a significant decrease in the value of foreign bonds that the bank previously purchased at high prices, with paper losses continuing to expand.

In fact, the total amount of foreign bonds held by Japanese commercial banks has reached 850 billion USD, of which nearly 450 billion USD are U.S. bonds. The dilemma these banks face is that as the interest rate differential between the U.S. and Japan widens, the cost of hedging against dollar risk has surpassed the higher yields offered by U.S. Treasury bonds.

Specifically, the Bank of Japan usually sells US dollars and buys Japanese yen in the three-month forward market to hedge against currency risk. However, as the interest rate differential between the US dollar and the Japanese yen widens, the forward points become negative, resulting in the yield on US Treasuries after foreign exchange hedging being lower than that of directly purchasing Japanese government bonds denominated in yen.

In this case, the Bank of Japan has to consider selling US Treasury bonds. However, this could lead to a surge in US Treasury yields, significantly increasing the financing costs for the US government. To avoid this situation, the US Treasury Secretary may ask the Bank of Japan to purchase these bonds and utilize the repurchase mechanism established by the Federal Reserve for foreign and international monetary authorities (FIMA).

The FIMA repo mechanism allows central bank members to pledge U.S. Treasury securities and receive newly minted dollars overnight. The use of this mechanism will increase the liquidity of dollars in the global money market, which could have a positive impact on the Bitcoin and cryptocurrency markets.

In the current situation, investors may need to reconsider their investment strategies. Some analysts suggest that the cryptocurrency market could provide new investment opportunities in such an uncertain environment. However, investors should proceed with caution and fully consider market risks.

Overall, the challenges facing the Japanese banking sector and the potential responses from the U.S. government will have far-reaching implications for global financial markets. Investors need to closely monitor these developments and adjust their investment strategies accordingly.