How the United States Responds to the Financial Crisis Triggered by Yen Arbitrage Trading

When the market is sluggish but there's a need to win elections, politicians often choose to print money and manipulate prices upwards. U.S. presidential candidate Kamala Harris is faced with such a dilemma: how to deal with the potential global financial crisis triggered by the unwinding of massive yen Arbitrage trades by Japanese companies.

Japanese companies have long taken advantage of the Bank of Japan's loose monetary policy to engage in large-scale Arbitrage trades, borrowing low-interest yen to purchase high-yield foreign assets. The scale of these trades is enormous, with total exposure reaching 505% of Japan's GDP, approximately $24 trillion.

However, the excessive depreciation of the yen has triggered inflation issues, leading the Bank of Japan to consider exiting this trap. Disorderly unwinding may result in a significant appreciation of the yen and a sharp decline in global stock markets. If the USD/JPY rises to 100, the Nasdaq index could fall to around 12,600 points.

The economic structure of the United States relies on Japanese companies continuing to engage in Arbitrage. If the trading ends, the U.S. government's finances will be in trouble. Therefore, the U.S. government is likely to take rescue measures.

A possible rescue plan is to provide dollar liquidity to Japan through central bank currency swaps (CSWAP), helping the Bank of Japan acquire foreign assets of Japanese companies, while not affecting the U.S. stock and bond markets. This would lead to an expansion of the Federal Reserve's balance sheet, but could avoid a financial crisis.

For cryptocurrency investors, it is necessary to weigh the positive factors of liquidity injection by the U.S. Treasury against the negative impact of a stronger yen. Observing the relationship between Bitcoin and the USD/JPY exchange rate can indicate market expectations. If Bitcoin shows a pronounced trading pattern, one can actively increase positions; if it moves in sync with traditional markets, it is advisable to wait and watch.

Regardless, the next few months will be a critical period for determining the returns of this bull market. Caution should be exercised when using leveraged trading and risk management should be handled carefully.