Besant failed to stabilize the market, and Japan risks repeating the "1997 ASIA FINANCIAL CRISIS."

This week, the U.S. market has rarely seen simultaneous pressure on "stocks, bonds, and currency": U.S. stocks, Treasuries, and the dollar have all weakened at the same time, while the yen has also not been spared. The market has started to doubt the effectiveness of the U.S. Treasury's policy attempt to stabilize long-term rates through bond buybacks and supply management. On August 21, Nomura's macro strategist Jun Matsuzawa suggested that the "Hayes bearish options," aiming to suppress long-term yields by expanding government bond buybacks, are becoming ineffective. The intervention has not only failed to stabilize the bond market but has also increased downward pressure on the dollar. On Wednesday, the U.S. Treasury announced a plan to at least double the scale of its buybacks for 10- to 30-year Treasuries, just two weeks after its last announcement. However, the support from this policy lasted less than a day: after a brief decline, the yields on long-term Treasuries quickly rebounded and remained stable throughout the week. What is even more concerning is that the policy path of the U.S. might serve as a cautionary tale for Japan. Matsuzawa warned that if Japan tries to lower long-term financing costs through bond supply management, the pressure could shift from the bond market to the currency market, ultimately resulting in yen depreciation; if market confidence further deteriorates, it could trigger capital outflows, leading to risks similar to those seen during the 1997 Asian financial crisis. Hayes may be concerned about a scenario resembling the chain reaction seen in 1997. Hayes views the current yen issue in the context of the 1997 Asian financial crisis, highlighting the similarities in mechanisms. Before 1997, the low cost of yen financing fueled yen carry trades, amplifying the overvaluation of Asian currencies. Then, the Federal Reserve raised interest rates in March 1997, prompting a liquidation of these carry trades. Subsequently, Japan's own financial and fiscal crisis exacerbated global credit tightening. The corresponding issue now is the AI boom in the U.S. and the potential inflationary pressures that follow. Investments related to AI still show resilience, with large tech companies competing with government bonds for funding. The rising yields of Treasuries reflect not just fiscal supply dynamics but could also involve repricing of growth, inflation, and funding demands. Regarding the unilateral depreciation of the yen, Hayes's real fear may be that funds withdraw from U.S. Treasuries and other dollar-denominated assets while the yen continues to be used as a financing currency. If the Federal Reserve is forced to raise rates again while Japanese policies remain in a reinflationary stance, controlling the reverse volatility of yen carry trades will become more challenging. The "currency alliance" between the U.S. and Japan: Historical echoes and current pressures Hayes believes that the weakening of the yen is one of the causes of the Asian currency crisis in the late 1990s, and he is committed to preventing a repeat of that risk. This contrasts with the refusal by then Treasury Secretary Robert Rubin to engage in coordinated interventions, which led to the plummeting of the yen in 1998. Citigroup analyst Nobuhiko Takashima specifically analyzed the geopolitical and economic policy context of the current intervention in his report. Jun Mimura, head of the International Bureau of Japans Ministry of Finance, referred to this intervention as "a culmination of the U.S.-Japan currency alliance" and included it within the framework of the U.S.-Japan economic security alliance. The historical reference is clear and alarming: during the Japanese financial crisis of 1998, then-Treasury Secretary Rubin consistently refused to partake in coordinated interventions, resulting in the yen's dramatic drop from 147 to a low of 108 against the dollar, triggered by the Long-Term Capital Management (LTCM) crisis. At that time, Rubin set the condition for "coordinated intervention" as a requirement for Japan to clear its bad debts. This time, Hayess condition is for the Japanese government to abandon its reinflation stance. This intervention also introduces a new technical aspect: the U.S. Treasury sells euro/yen (EUR/JPY) through the Exchange Stabilization Fund (ESF), which will alter the composition of the ESF's foreign currency assets. As of June 2026, the ESF held approximately $1.17 billion in euro assets (including deposits and securities) and about $580 million in yen assets (including deposits and securities). Citigroup believes that if EUR/JPY approaches 185-186 yen, the likelihood that the Japanese government will follow up with interventions in EUR/JPY will significantly increase, and it is expected to receive tacit approval from European authorities. Hayes downplays inflation risks, while the market worries that being "behind the curve" could be harder to correct. Market interpretations of Hayes's actions have been quite negative, with the dollar reacting even more sharply than Treasuries, showing a clear weakening. The market is concerned that if the Treasury stabilizes the bond market through supply and demand adjustments, the previously necessary process of catching up with rates through rate hikes may be further delayed, potentially keeping monetary policy more accommodative. Hayes previously stated that market concerns about inflation "do not align with the fundamentals," asserting that the current inflation pressure is primarily driven by energy and is a temporary factor. This judgment may suggest he underestimates the potential impact of AI on economic growth, inflation, and funding supply-demand dynamics. The minutes from this week's FOMC meeting also reveal that officials have significant disagreements regarding whether the inflation pressures resulting from AI will broadly transmit, and consensus has not yet been reached. Caution against repeating the mistakes of the "Hayes bearish options": lowering long-term bond yields could backfire on the yen. The report specifically warns that Japan should view the ineffectiveness of the U.S. "Hayes bearish options" as a cautionary tale rather than remain detached. The yen remains weak this week, but the Japanese stock market suffered the largest decline among the G3 markets, dropping 3.3%, while American and European markets fell by 1.9% and 1.1%, respectively. Meanwhile, the yield on 10-year Treasuries rose by 1 basis point, European government bond yields increased by 5 basis points, while Japanese 10-year government bond yields fell by 3 basis points. This divergence partially reflects changing market expectations regarding Japanese policy. The issue lies in the possibility that if Japan emulates the U.S. by trying to lower bond yields through reduced long-term government bond issuance, the side effects could manifest as yen depreciation. Given that the Bank of Japan holds nearly 50% of the Japanese government bond market, its control over the bond market is significantly stronger than that of the Federal Reserve, but this also means that market distortions may mainly appear in the exchange rate. What is more alarming is that the yen is already a weak currency, unlike the dollar, which is a key reserve currency. Matsuzawa likens the current environment to the technological boom period of the 1990s, during which the Asian currency crisis intensified, pointing out that if Japanese policy deviates, the risk of Japan shifting from a source of capital inflow to being a source of capital outflow is quite high. In this context, he believes that Japan at least needs to make a clear statement abandoning its expansive anti-inflation credit policies, which is the minimum necessary condition to stabilize market expectations. Expectations for Bank of Japan rate hikes rise, intensifying the competition for funding in the credit market driven by AI capital expenditures. This week, the market's pricing for the Bank of Japan's rate hike path has further heated up, with the probability of a rate hike in September rising to about 80%. The market has also factored in expectations for three more hikes, with the policy rate expected to ultimately reach 1.75%; the expected final rate in Japan (2-year forward OIS) has risen from 2.19% to 2.23%. The signals recently released by the Bank of Japan have indeed leaned hawkish, leading the market to even discuss accelerating the pace of rate hikes. However, Nomura believes that the Japanese economy still has certain resilience, and remarks from Deputy Governor Masayoshi Amamiya may further strengthen expectations for a September rate hike, but this does not necessarily mean that the Bank of Japan will commit to faster hikes. Therefore, under the current market conditions that are already highly priced in, even if the September hike materializes, it may not serve as a new positive catalyst. In contrast, a more pressing concern is the competition for funds between tech companies' bonds and government bonds. The credit default swap (CDS) spreads of several mega-scale tech companies (Hyperscalers) have risen to historic highs, reflecting market worries about the pressure of AIs heavy capital expenditures on corporate financing capabilities. The high capital demand from AI investments is beginning to transmit into the credit market, competing for funds with government bond financing. Although the U.S. earnings season has further validated the supporting effect of AI investment on corporate profits and capital spending, if the tech corporate bond market continues to face pressure, changes in its financing costs and risk appetite may inversely affect the stock market. Therefore, whether tech corporate bonds can stabilize will become an important external indicator of whether the stock market can hold its ground next week. Additionally, remarks by Neel Kashkari regarding balance sheet policy (QT) during the Jackson Hole Annual Economic Symposium are also noteworthy. If he signals a continuation of balance sheet contraction and avoids injecting excessive liquidity into the financial markets, it could further tighten liquidity conditions and create pressure on equity markets. His consistent caution against excessive liquidity leading to distorted asset prices makes this risk especially deserving of attention. This article is reproduced from the "Wall Street Journal" APP, by authors: Li Jia, Bao Yilong; GMTEight editor: Song Zhiying.