The Wobbling Japanese Yen Could Trigger A Global Financial Crisis—Here's How To Deal With It

Japan's weakening currency reached a 40-year low against the dollar.

The fear is that a further fall in the yen's value will precipitate a crisis of confidence that will not only set off a serious bout of inflation inside Japan itself, The very definition of monetary inflation is reducing the value of a currency, but it will also adversely impact financial markets around the world.

That's why the US just undertook with Japan a very rare joint intervention in currency markets to prop up the yen.

In other words, we both use dollars to buy the yen.

The intervention has had success, But most experts believe the relief will be short-lived because of adverse fundamentals in Japan.

These include a too-low short-term interest rate, which is around 1% versus 3.5% in the U.S., a national debt that is proportionate twice that of the U.S.'s, rising energy prices, and a declining and aging population.

The immediate worry for U.S. Treasury Secretary Scott Besant is that in an effort to save the yen from collapse, Japan will start liquidating its $1.1 trillion portfolio of Treasury bonds and bills, not to mention its holdings of German and British bonds.

After all, financing our immense budget deficit and refinancing some $7 trillion of our existing debt coming up for renewal is already worrying the markets.

This anxiety is why, for instance, the interest rate on our 30-year Treasury bond has reached its highest level in almost 20 years.