Japan to Sell Large Amounts of US Treasury Bonds Arthur Hayes US to Initiate Money Printing Need to Accelerate Movement into Crypto Risk Assets

Recently, it was reported that the Japan Agriculture, Forestry and Fisheries Finance Corporation (JAFFC) plans to sell US Treasury bonds and European bonds worth up to 10 trillion Japanese yen (about 63 billion US dollars), which could lead to a comprehensive net loss of about 1.5 trillion Japanese yen in the fiscal year ending in March 2025.

JAFFC, as the central organization of the agricultural, forestry, and fisheries cooperatives financial institution, is currently negotiating with agricultural cooperatives across the country regarding this plan. The goal is to raise approximately 1.2 trillion Japanese yen in new capital to ensure its financial health.

As of the end of March, JAFFC managed financial market assets of about 56 trillion Japanese yen, with foreign bonds accounting for 42%. The potential losses in bond investments, including foreign bonds, amount to approximately 2.2 trillion Japanese yen.

Arthur Hayes pointed out that JAFFC is the first bank to surrender and announce the need to sell bonds. He expects that other Japanese banks will engage in similar activities. According to a survey by the International Monetary Fund (IMF), Japanese commercial banks are expected to hold approximately 850 billion US dollars of foreign bonds by 2022, including nearly 450 billion US dollars of US Treasury bonds and about 75 billion US dollars of French bonds.

Hayes explained why Japanese banks chose to sell US bonds and exit at a loss at this time. Japanese banks do not purchase foreign bonds with Japanese yen. Their operating method is to sell Japanese yen and buy US dollars for foreign exchange hedging, using 3-month rolling foreign exchange liquidity with better liquidity. However, as shown in the chart below, with interest rates in various countries continuously rising, starting from the middle of 2022, the hedging costs of Japanese banks have far exceeded the returns from purchasing foreign bonds. This interest rate differential cannot be narrowed in the short term (although the Bank of Canada and the European Central Bank have begun to initiate interest rate cuts, the United States has not yet started, and even if it does, the progress will be slow, which will not be of great help in reducing the current interest rate differential). Therefore, JAFFC took the initiative to prepare for a loss exit, and Hayes believes that many Japanese banks are facing the same dilemma.

Hayes believes that the Bank of Japan (BOJ) will take action first and suggests that Japanese banks should not sell US bonds in the open market, but rather directly transfer these bonds to the balance sheet of the Bank of Japan to avoid market impact.

Then, the Bank of Japan will hold these US bonds until maturity through the Foreign and International Monetary Authorities Repo Facility (FIMA) in the United States.

FIMA, launched by the Federal Reserve System (Fed) in March 2020, is a tool that aims to support the liquidity of global financial markets and alleviate the impact of the pandemic on the global economy.

This agreement allows foreign central banks and international organizations to use their holdings of US Treasury bonds as collateral to apply for US dollar liquidity from the Federal Reserve. During the transaction, FIMA account holders can temporarily sell their US Treasury bonds to the Fed in exchange for US dollars, and repurchase the bonds according to the agreed maturity date to meet temporary US dollar needs.

If the Bank of Japan sells a large amount of US bonds in the market, causing an increase in US bond yields (price decline leads to an increase in yields), it will cause various loan rates in the United States based on US bond yields to skyrocket. Hayes believes that this is not what the US government wants to see in this election year.

The Bank of Japan is one of the few central banks that can use the FIMA repurchase agreement, so Hayes believes that the United States will definitely step in to ensure that US bond yields remain at a lower level to avoid financial market disasters. And the way to provide this liquidity is through the “printing money” of FIMA!

Therefore, Hayes stated that this is why he is accelerating the conversion from pledging US dollars (sUSDe) to cryptocurrencies. He also mentioned in a tweet on June 19 that he is increasing his positions in Pendle and Doge.

Arthur Hayes
FIMA
JAFFC