Arthur Hayes: Dollar Weakness and Yen Strength Transition Triggering Cryptocurrency Rally

Arthur Hayes recently focused on the changes in Japan's capital flow rather than U.S. interest rate comments as the backdrop for the recent cryptocurrency rebound. The analysis suggests that the expectation of Japanese funds moving from overseas back to domestic markets could induce yen strength and dollar weakness, impacting the market.

In an interview with The Rollup on September 8, BitMEX co-founder Arthur Hayes stated that the potential changes in asset allocation of Japan's public pension and the trend of yen appreciation are the backdrop for the cryptocurrency market rally. He remarked, "This is all about liquidity," predicting that discussions among major countries could become clearer in the coming days or weeks.

Regarding comments from former Federal Reserve Governor Kevin Warsh, he stated, "It's not important," diagnosing that the key factor driving the market recently is not U.S. interest rate comments but rather Japan's policy changes and yen movements.

He highlighted that in mid to late July, a Japanese Ministry of Finance official mentioned the need to review the overseas asset holding standards of domestic institutions, particularly public pensions, and to increase the proportion of domestic assets. At that time, the dollar-yen exchange rate was around 162-163 yen per dollar. Initially, the market doubted whether this would lead to actual policy changes, but the subsequent movements in the exchange rate changed that perspective.

He noted that during the time of Abenomics, it took about two years for changes in the asset allocation of Japan's public pension to be formalized. At that time, the direction was to increase the proportion of overseas assets compared to domestic ones. As Japanese investors and companies expanded their investments in overseas stocks and bonds, the selling of yen and buying of foreign currencies increased, leading to yen depreciation.

Hayes believes that this time, the movement could be in the opposite direction. He suggested that Japan's public pension might reduce its holdings in foreign bonds, stocks, and foreign assets while increasing the proportion of domestic assets such as Japanese government bonds, corporate bonds, and real estate. If the funds from the sale of overseas assets return to Japan, the demand for yen could increase, leading to upward pressure on the yen.

He cited reports that Japan's public pension held an extraordinary meeting in August and the recent sharp movements in exchange rates as evidence. The dollar-yen exchange rate moved from the 160 yen range to the 155 yen range in a single trading day, and the euro-yen exchange rate also fell by about 3 yen during Asian trading hours. Hayes suggested that "the market does not move from 160 to 155 yen without any news," indicating that the market may have sensed changes that have not yet been made public.

He also sees the possibility that specific measures could be announced in the future. There is speculation that the Federal Reserve might increase the limits on repurchase agreements providing dollar liquidity to foreign monetary authorities, or that Japan's public pension might announce plans to reduce its overseas asset proportion and increase domestic assets. Hayes explained that such measures could lead to dollar weakness and yen strength.

He interpreted that the Trump administration also desires dollar weakness and yen strength. He argued that for the U.S. to restructure global trade and enhance the competitiveness of its manufacturing sector, the value of the dollar needs to decrease. He particularly noted that Japan relies on U.S. security support, making it easier for the U.S. to exert influence over policy directions compared to China.

The recent surge in cryptocurrencies is also analyzed as a cumulative result of expectations for these changes. He pointed out that while major stock indices have not shown significant upward trends, cryptocurrencies rebounded first. Hayes stated, "Now the game is on," explaining that the market reflects the possibility of increased liquidity in the future.

Regarding yen carry trades, he emphasized the need to view Japan as a single economic entity. Japan's pension funds, corporations, and financial institutions have long invested heavily in overseas assets, including those in the U.S., based on low-interest yen. Yen depreciation and the rise of overseas assets such as U.S. tech stocks have favored these investments.

However, he noted that if Japan's public pension begins to move in the opposite direction, the overall capital flow in Japan could also change. There could be a trend of reducing overseas stocks, bonds, and foreign assets, returning funds to Japan for investment in government bonds, domestic companies, and real estate.

Hayes pointed out that these changes could also pose challenges for the U.S. He explained that for the past 30 years, Japanese capital has supported asset prices in U.S. stocks and bonds, and the process of Japanese funds returning home may not be smooth. He predicted that the U.S. might respond by increasing dollar liquidity while rebuilding its industrial base and aiming to reduce the debt-to-GDP ratio from around 100% to 30% in the long term.

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