Bescent failed to stabilize the market, and Japan is at risk of repeating the "1997 ASIA FINANCIAL CRISIS."

This week, a rare tri-pressure on stocks, bonds, and currency occurred in the U.S. market: U.S. stocks, U.S. Treasuries, and the U.S. dollar all weakened simultaneously, and the Japanese yen was not spared either. The market is beginning to doubt the effectiveness of the U.S. Treasury's policy aimed at stabilizing long-term interest rates through bond buybacks and supply management. Nomura Securities macro strategist Nakanishi Matsuzawa believes that the Benson Put Option, which aimed to lower long-term yields through expanded Treasury buybacks, is failing. The policy intervention not only failed to stabilize the bond market but also further increased downside pressure on the dollar. On Wednesday, the U.S. Treasury announced that it would at least double the scale of bond buybacks for 10 to 30-year Treasuries, just two weeks after the last announcement of its buyback plans. However, the policy support for the market lasted less than a day: after a brief retreat, long-term U.S. Treasury yields quickly rebounded and remained flat for the entire week. Whats even more concerning is that the U.S. policy path may serve as a cautionary tale for Japan. Matsuzawa warned that if Japan also attempts to lower long-term financing costs through bond supply management, pressure might shift from the bond market to the currency market, ultimately resulting in a depreciation of the yen; if market confidence further deteriorates, it could also trigger capital outflows, leading to risks similar to those experienced during the 1997 Asian Financial Crisis. Benson downplays inflation risks, while the market fears that being behind the curve will be harder to rectify. The market interprets Benson's operations quite negatively, as the dollar's response was even more pronounced than that of U.S. Treasuries, significantly weakening. The market is concerned that if the Treasury stabilizes the bond market through supply and demand adjustments, the process that originally needed to catch up with the behind the curve situation may be further delayed, potentially keeping monetary policy in a more accommodative state. Benson had previously expressed that market concerns about inflation do not align with the fundamentals, asserting that current inflationary pressures are primarily linked to energy and are transitory. This judgment may imply that he underestimates the potential impact of AI on economic growth, inflation, and the overall supply-demand landscape. The minutes from the Federal Reserve's FOMC meeting released this week also revealed significant divisions among officials regarding whether inflationary pressures from AI would broadly transmit, and a consensus has yet to be reached. Caution against the Benson Put Option repeating past mistakes: lowering long-term yields could backfire on the yen. The report particularly warns that Japan should view the failure of the U.S. Benson Put Option as a cautionary tale rather than distancing itself from it. This week, the yen remained weak, but the Japanese stock market experienced the largest decline among G3 markets, dropping 3.3%, while the U.S. and European markets fell 1.9% and 1.1%, respectively. Meanwhile, the yield on ten-year U.S. Treasuries rose by one basis point, European government bond yields increased by five basis points, while the yield on Japanese ten-year government bonds fell by three basis points. This divergence partially reflects changing market expectations regarding Japanese policy. The issue is that if Japan emulates the U.S. by reducing long-term Treasury issuance to lower yields, the side effects may manifest as a depreciation of the yen. 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 more prominently reflect in the currency exchange rate. Whats even more alarming is that the yen is already a weak currency, unlike the dollar, which is a key reserve currency. Matsuzawa compares the current environment to the period of the 1990s tech boom, which exacerbated the Asian currency crisis and points out that if Japan's policies deviate, the risk of Japan transforming from a source of capital inflow to a source of capital outflow is quite high. In this context, he believes Japan needs to clearly indicate its abandonment of large-scale policy credit aimed at combating inflation, which is the minimum necessary condition for stabilizing market expectations. Expectations for a Bank of Japan interest rate hike are heating up, with AI capital expenditures intensifying competition for funds in the credit market. This week, market pricing for the Bank of Japans interest rate hike path further warmed up: the probability of a rate hike in September has risen to about 80%, and expectations now account for three additional rate hikes, with the policy rate ultimately reaching 1.75%; the expected final rate for Japan (2-year forward OIS) has also increased from 2.19% to 2.23%. Recent signals released by the Bank of Japan certainly lean hawkish, and the market has even started discussing the acceleration of the hiking pace. However, Nomura Securities believes that the Japanese economy still possesses a certain degree of resilience, and Deputy Governor Yamamoto's statements might further reinforce the September rate hike expectations, but it does not necessarily mean that the Bank of Japan will commit to a faster rate hike pace. Hence, given the current market already heavily priced in, even if a rate hike occurs in September, it may not constitute a new positive catalyst. In contrast, a bigger concern lies in the competition for funds between technology corporate bonds and government bonds. The credit default swap (CDS) spread of some massive tech companies (Hyperscalers) has surged to historical highs, reflecting market worries about the impact of substantial AI capital expenditures on corporate financing capabilities. The high capital demand from AI investments is transmitting to the credit market and competing for funds with government bond financing. While the U.S. earnings season further confirmed the supportive role of AI investments on corporate profits and capital expenditures, if the tech corporate bond market continues to face pressure, changes in their financing costs and risk preferences may inversely affect the stock market. Therefore, whether tech corporate bonds can stabilize will become an important external indicator for the stock market's ability to hold ground next week. Additionally, comments from Kashkari at the Jackson Hole conference regarding balance sheet policies (QT) are also worth noting. If he signals a continuation of asset balance sheet contraction, avoiding injecting excessive liquidity into the financial market, it may further tighten the liquidity environment and create pressure on equity markets. His consistent caution regarding excessive liquidity leading to distorted asset prices makes this risk particularly worthy of attention. This article is reprinted from "Wall Street Journal," author: Li Jia, GMTEight editor: Li Cheng.