The dollar-yen exchange rate manoeuvre reveals that money creation has become a variable of foreign policy
Arthur Hayes, in his latest essay titled Yen-Quake, published on his Substack Crypto Trader Digest, develops a thesis that deserves attention beyond the context in which it is framed: the Trump administration, through Treasury Secretary Scott Bessent, is using the dollar-yen exchange rate as a lever to force the Federal Reserve to expand the monetary base. The mechanism, if confirmed in its operational logic, carries a structural consequence that goes well beyond the current cycle: money creation in advanced economies has become a variable of foreign policy, decoupled from any domestic mandate of stability.
The exchange rate as a tool to expand money supply
The causal chain Hayes describes works as follows. A weak dollar against the yen reduces the competitiveness of Japanese exports and increases the dollar value of US Treasury securities held by Japan’s Ministry of Finance and Japanese institutional investors. When the yen appreciates, those investors incur local-currency losses on their dollar positions, generating selling pressure on Treasuries. The specific mechanism Hayes places at the centre of his essay is more precise: according to his analysis, Japan’s Ministry of Finance could deposit its Treasuries at the Federal Reserve’s FIMA Repo Facility, receive dollars in exchange, sell those dollars to buy yen, and reinvest in domestic assets. This operation would expand the Fed’s balance sheet by creating new dollar liquidity, without Japan having to liquidate its US securities directly. Bessent – in Hayes’s reading – has publicly supported raising the operational ceiling of the FIMA Repo Facility, which is interpreted as evidence that the US administration has deliberately taken this route: a tool for obtaining externally what would be politically costly to demand openly at home, namely monetary easing from the central bank.
The Fed has a formal mandate: price stability and full employment. On that basis it constructs its narrative of independence. What Hayes’s reading brings to light is that that independence is conditional on the geometry of the currency market – and that a sufficiently determined government can alter that geometry without ever uttering the word “print”. The central bank remains formally autonomous; operationally, it responds to the structural incentives that other actors create.
A familiar dynamic, now explicit
Japan occupies a particular position in this architecture. The Bank of Japan maintained negative or near-zero interest rates for years – negative rates were introduced in January 2016 and abandoned only in March 2024, when the BOJ raised its benchmark rate for the first time in seventeen years – contributing to a global carry trade in which low-cost Japanese capital financed purchases of dollar-denominated assets. When that position reverses – through yen appreciation or rising Japanese rates – the liquidity that had supported the US market withdraws. The episode of July-August 2024, when a Bank of Japan rate rise on 31 July 2024 – which surprised markets by lifting rates to 0.25% – produced a wave of volatility across global markets, with the Nikkei falling nearly 20% in a matter of days and the VIX reaching its highest levels since the pandemic, demonstrated how concrete this chain is and how quickly it transmits. Hayes describes something the market has already experienced.
What changes in the current analysis is the degree of intentionality attributed to the use of this channel. Currency wars have existed for decades: the Plaza Accord of 22 September 1985 is the textbook case, with the five G5 countries (the United States, Japan, West Germany, France and the United Kingdom) agreeing to devalue the dollar in a coordinated fashion through concerted interventions in currency markets. What Hayes suggests is that today the pressure operates unilaterally and deliberately obliquely – through the manipulation of exchange rate expectations to produce balance-sheet effects that make Fed monetary expansion inevitable.
The domestic mandate as cover
To whom does a central bank truly answer when external pressures redraw the parameters within which it operates? The formal answer – it answers to its legal mandate – holds as long as that mandate does not collide with the sovereign’s financing needs. When US public debt reaches levels that make refinancing dependent on foreign demand, and that foreign demand is manipulable through the exchange rate, the domestic mandate becomes a frame that describes the process without actually governing it.
This is precisely the point at which the Austrian critique of central banking finds an updated empirical confirmation. The Fed produces instability by design, not through the incompetence of its governors. The instability stems from the fact that a single institution cannot simultaneously: hold rates consistent with domestic conditions, absorb excess sovereign debt when foreign demand retreats, and resist the geopolitical pressures that continually redraw the conditions of that demand. These three functions are in permanent tension, and the third – the geopolitical one – is the least visible in public debate but potentially the most binding in the short term.
Hayes is not an academic economist and his interests are not neutral. But the mechanism he describes is verifiable in its logic: if the US Treasury depends on foreign demand for Treasuries, and that demand is sensitive to the exchange rate, then the currency policy of any large reserve holder becomes, in effect, US monetary policy by transmission.
The Fed can pretend not to hear, but the balance sheet does not lie.
