The US economy is facing a recession – and while the Federal Reserve’s missteps with interest rates are under scrutiny – a surprising factor may be driving the downturn, warns the CEO of one of the world’s largest independent financial advisory and asset management organisations.
Nigel Green of the deVere Group says that a global stocks selloff extended on Monday as fears grow that the Fed is behind the curve with policy support for a slowing US economy.
“The Fed is facing criticism for its handling of interest rates,” Green says. “Initially, it was slow to raise rates to combat inflation and now, as economic growth slows, there are fears it’s moving too slowly to cut them. This has created uncertainty, making markets jittery and raising fears of a recession.
“But there could also be another trigger for a global market sell-off: Japan, the world’s third-largest economy,” Green adds.
“In recent weeks, the Japanese yen has surged by about 8% against the US dollar, now trading at 148.84 per dollar,” he says. “This sharp increase reverses its decline from early July, when the yen hit 161.96 per dollar, the weakest it had been since December 1986.
“This rise in the yen spells trouble for the popular ‘carry trade’ strategy,” Green continues. “Investors typically borrow in a low-interest currency like the yen to invest in higher-yielding currencies such as the US dollar.
“But with the yen strengthening, the cost of maintaining these trades has skyrocketed – leading to a rapid sell-off in US equities as investors scramble to repay yen-denominated debts.
“This shift highlights the vulnerability of US markets to changes in global financial dynamics,” he says. “The drop in US stock prices as the yen strengthens is a clear indicator of how interconnected global economies have become.
“Clearly, the economic turmoil in Japan is not just a local issue -it has global implications. The stronger yen is making it more expensive for Japanese companies to borrow, threatening their ability to invest and grow.
“This slowdown in Japanese business activity could reduce demand for US exports and investments, directly affecting American companies with ties to Japan.
“Japan’s stock markets are feeling the strain, with major indexes like the Topix and Nikkei facing potential declines of up to 20% from recent highs,” Green says. “The yen rallied strongly on Monday on assumptions the Bank of Japan will keep raising interest rates.
“The bank is caught in a bind, needing to raise interest rates to control inflation, which could tip the economy – the world’s third largest – into recession.”
The yen’s rise is a warning sign of the complex interdependencies in today’s global economy. As US markets react to changes in the yen’s value, it highlights the delicate balance between domestic economic policy and international financial influences.
Japan’s current crisis, fuelled by currency fluctuations and rising interest rates, could trigger a broader sell-off in global markets.
This scenario underscores the fragility of the international economic system, where shifts in one major economy can have significant ripple effects worldwide.
As Japan tackles its economic challenges, the impact on the US and global markets could be profound, shaping economic policies and market strategies for the foreseeable future.
“While it seems all eyes are on the Fed, investors should also be paying close attention to what’s happening across the Pacific,” says Green.