Arthur Hayes believes that U.S. Treasury Secretary Scott Bessent is preparing a method to strengthen the yen, which could also force the Federal Reserve to create a large amount of new dollar liquidity. Arthur's argument focuses on the Fed's FIMA repo mechanism.
In his latest essay titled "Yen-quake," Arthur stated that Japan could pledge its U.S. Treasury bonds as collateral at the Federal Reserve, borrow dollars, sell those dollars for yen, and then use the yen to purchase Japanese assets.
However, according to Arthur, a crucial aspect of this system is the creation of dollars, as an expanded Federal Reserve balance sheet could directly contribute to the growth of Bitcoin, Ether, gold, miners, and other financial assets.
Arthur argues that raising interest rates and selling foreign assets would create problems Japan and the U.S. want to avoid
Arthur outlines three ways Japan could strengthen the yen. The Bank of Japan could aggressively raise interest rates. The government could push GPIF and other institutions to sell overseas assets and bring cash back to the country.
Alternatively, the Ministry of Finance could borrow dollars from the Federal Reserve via FIMA and use those dollars to buy yen. Arthur believes the third option is acceptable to both Washington and Tokyo.
The interest rate differential makes the first option difficult to implement. Arthur notes that dollars currently yield approximately 2.75 percentage points more than yen. Traders can borrow yen at low rates, exchange them for dollars, and then buy Treasury bills. Raising interest rates in Japan would narrow this differential and support the yen.
On the other hand, the Bank of Japan holds a massive amount of Japanese government bonds due to years of yield curve control policy. Raising interest rates would lower the value of these bonds and create even larger unrealized losses for the central bank. Furthermore, higher government bond yields would increase the Japanese government's expenses.
"What happens when interest rates rise? Bond prices fall. The lower bond prices fall, the larger the Bank of Japan's unrealized losses. Unlike you, readers, the Bank of Japan can lose an infinite amount of yen because it can print them at will."
Arthur also notes that a sudden surge in the yen could force traders who borrowed yen to finance stock and bond positions in other countries to quickly close those positions.
The second option is politically cleaner within Japan but much riskier for American markets. GPIF manages assets worth approximately $1 to $2 trillion. Allocation changes in 2014 led to increased purchases of foreign stocks and bonds, creating a steady source of yen selling.
Arthur says Japanese officials are currently discussing the possibility of investing more funds in domestic securities. If this policy eventually reaches GPIF, hundreds of billions of dollars could flow back to Japan.
But if Japan becomes a major seller of U.S. Treasury bonds and American stocks, Washington would receive a massive amount of yen, but lose one of the largest overseas sources of demand for U.S. assets.
Arthur says neither country wants to find out what would happen if the USD/JPY rate dropped from around 160 to approximately 90, which he termed the fair value purchasing power parity estimate.
Bessent wants FIMA to allow Japan to buy yen while the Federal Reserve supplies dollars
Arthur says the third option avoids forcing Japan to sell its Treasury bonds, as the Ministry of Finance pledges Treasury securities as collateral via FIMA. The Fed then provides dollars against this collateral. Tokyo sells these dollars on the forex market and buys yen. The yen can then be used to purchase Japanese government bonds and stocks in the domestic market.
"The Ministry of Finance conducts repo operations on Treasury bonds and receives a dollar loan under the Fed's FIMA facility. The Ministry of Finance sells the dollars and buys yen on the global forex market. The Ministry of Finance reinvests the yen domestically by purchasing Japanese government bonds and stocks."
Arthur argues that the Federal Reserve would have to create the dollars used for these loans. As FIMA facility borrowing grows, the central bank's balance sheet would expand alongside it.
This is where his Bitcoin thesis comes in. The collateral is enormous. Arthur estimates that the Japanese government owns $1.143 trillion in U.S. Treasury bonds. GPIF owns another $230 billion.
Combined, this gives them about $1.373 trillion in Treasury bonds.
For comparison, the Federal Reserve's balance sheet increased by roughly $4 trillion from 2020 to the end of 2021.
Arthur says the Fed's Foreign Currency Subcommittee could change the rules for operating FIMA. He expects Trump and Bessent to push Fed Chair Kevin Warsh for the necessary changes.
Arthur concluded his essay by stating that his current views are already focused on Bitcoin, physical gold, and gold miners.
Arthur also views Ether as the main large-cap crypto alternative because "the main idea is that it's the only major shitcoin that hasn't surpassed its 2025 all-time high; furthermore, Ethereum will become the security layer for risk-weighted assets (RWA)."
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