Reminder: first-time homebuyers have a tremendous rate advantage.
My rate quote at the bottom of this blog is for a 5% down condo purchase for $750,000, assuming a first-time buyer with a 680 FICO.
My “no points” rate today is 6.75%* (the buyer is not impacted by the lower FICO, the higher LTV, or the property type/condo). If that buyer was not a first-time homebuyer, though, the rate would be at least 1/2% higher.
Japan’s Currency Crisis Should Scare The Heck Out Of You
99% of America is oblivious to the havoc taking place right now in international currency markets, as the Japanese yen came very close to collapsing.
Japan’s 35 Year Depression
The Japanese economy boomed in the late 1980s, as a result of way-too-low interest rates that sent asset prices to the moon – fostering one of the biggest real estate bubbles in history.
When Japan raised rates to stop the madness in 1989 and 1990, asset prices crashed and the economy ground to a halt. The banks and businesses dependent on low rates could not survive in a higher-rate environment.
Instead of making the banks write down the bad loans and instead of letting the bad (“zombie”) businesses go belly up, Japan propped them all up with artificially low rates and endless rounds of stimulus.
This resulted in 30+ years of stagnation and government debt levels of more than 200% of GDP – far higher than U.S. levels (about 125%).
To make all that debt affordable, Japan kept its rates near zero for decades – while printing money (yen) to help service the debt.
Despite all the debt and money printing, Japan avoided inflation until the post-COVID years. But once inflation showed up – and the yen started sliding – Japan was finally forced to start raising rates.
Japan’s Brutal Dilemma
Here’s Japan’s dilemma though: it can’t raise rates enough to defend the yen, because higher rates make its massive debt unaffordable – requiring even more yen printing. Investors see the trap, and that’s exactly why they keep betting against the yen.
(Note: This is not unlike the situation in the U.S., but the U.S. has a much stronger market for its debt because the dollar is the world’s reserve currency.)
A crashing yen terrifies Japan because it makes key imports (energy and food, all priced in dollars) far more expensive.
So Japan “defends” its yen by buying up yen in the open market to reduce the supply (and increase the value). In July, the yen hit 164 to the dollar – its weakest level since 1986 – and Japan reportedly sold as much as $59 billion in a SINGLE DAY to defend it, likely the largest one-day intervention in its history.
Why A Crashing Yen Scares The Heck Out Of Scott Bessent
And this is why a crashing yen scares America too: Japan raises those dollars largely by selling U.S. Treasuries. More Treasury supply on the market pushes yields up – which pushes up rates here at home, including mortgage rates.
Treasury Secretary Scott Bessent was so worried that the U.S. did something it hasn’t done since 1998: it jumped into the market and bought yen itself (the New York Fed sold euros to buy yen on the Treasury’s behalf). The U.S. also set Japan up with a Fed borrowing facility so Japan can raise dollars by pledging its Treasuries instead of dumping them.
Read that again: America’s rescue plan was designed largely to stop Japan from selling our bonds. That tells you exactly how real the threat to U.S. rates is.
There is one more threat worth mentioning: the unwinding of the “carry trade” (a topic that requires a full blog itself). The carry trade involves borrowing cheaply in Japan and investing overseas where yields are higher. When Japanese rates rise or the yen snaps back sharply, that trade blows up – and investors are forced to dump assets (including Treasuries) to pay off their yen debts. We saw a preview of this in August of 2024.
Long story short: Japan’s currency crisis truly is America’s problem too. Japan is our largest foreign creditor, holding over $1.1 trillion of U.S. Treasuries – and when Japan is forced to sell, our rates feel it.
