Japan to sell large amounts of US bonds? Arthur Hayes: US will start printing money, need to accelerate moving towards crypto risk assets!

Recently, the Japan Agricultural Central Bank reported that it will sell US and European bonds worth up to 10 trillion yen, approximately 630 billion US dollars. BitMEX co-founder Arthur Hayes commented on this, stating that the US will start printing money, prompting the need to accelerate the movement towards crypto risk assets!

This article reflects Arthur Hayes' personal views and is not investment advice.

The Central Union of Agricultural Cooperatives Plans to Sell 10 Trillion Yen of U.S. and European Bonds

According to a report from Japanese media, the Central Union of Agricultural Cooperatives in Japan is planning to sell up to 10 trillion yen, approximately 630 billion U.S. dollars, worth of U.S. and European bonds. This move may result in a comprehensive net loss of around 1.5 trillion yen for the fiscal year ending in March 2025.

The Central Union of Agricultural Cooperatives is the central organization of agricultural cooperative financial institutions, currently negotiating with agricultural cooperatives nationwide on the plan to raise about 1.2 trillion yen in new capital to ensure its financial health.

As of the end of March, the financial market assets managed by the Central Union of Agricultural Cooperatives amount to around 56 trillion yen, with foreign bonds accounting for 42%. The potential losses in bond investments, including foreign bonds, are estimated at around 2.2 trillion yen.

Arthur Hayes Explains Why Japanese Banks Are Cutting Losses

Arthur Hayes pointed out that the Central Union of Agricultural Cooperatives is the first bank to surrender and announce the need to sell bonds, and he expects other Japanese banks to engage in similar activities. According to a survey by the International Monetary Fund (IMF), by 2022, Japanese commercial banks hold about 850 billion U.S. dollars in foreign bonds. This includes nearly 450 billion U.S. dollars in U.S. bonds and about 75 billion U.S. dollars in French bonds.

He also explained why Japanese banks chose to sell U.S. bonds and cut losses at this time. Japanese banks do not use yen to purchase foreign bonds; their operation involves

1. Selling yen and buying dollars
2. Engaging in foreign exchange hedging: using forward foreign exchange rollovers with better liquidity for 3 months for hedging

However, as shown in the chart below, with interest rates rising in various countries, since mid-2022, the hedging costs for Japanese banks have far exceeded the returns from purchasing foreign bonds. This interest differential cannot be narrowed in the short term. Although countries including Canada and the European Central Bank have begun to initiate interest rate cuts, the U.S. has not yet started, and even if it does, it will be a slow process. The Central Union of Agricultural Cooperatives fired the first shot, preparing to cut losses, and Hayes believes that many Japanese banks are facing the same dilemma.

Arthur Hayes' Proposed Solution

Hayes believes that the Bank of Japan (BOJ) will take the first step, suggesting that Japanese banks should not sell U.S. bonds in the open market but instead transfer these bonds directly to the BOJ's balance sheet to avoid market impact.

Then, the BOJ will repurchase these U.S. bonds held through the Federal Reserve's FIMA facility until maturity.

What is FIMA?

FIMA repo agreement (Foreign and International Monetary Authorities Repo Facility) is a tool launched by the Federal Reserve System in March 2020, with the main purpose of supporting global financial market liquidity and mitigating the impact of the pandemic on the global economy.

This agreement allows foreign central banks and international organizations to use their holdings of U.S. treasuries as collateral to apply for U.S. dollar liquidity from the Federal Reserve. During the transaction, the holder of the FIMA account can temporarily sell their U.S. treasuries to the Fed in exchange for dollars and buy back the securities by the maturity date specified in the repurchase agreement to meet temporary U.S. dollar needs.

"Printing Money" is About to Start Again!

If the Bank of Japan sells a large amount of U.S. bonds in the market, causing an increase in U.S. bond yields and a decrease in prices, which leads to an increase in yields, it will result in a surge in various loan rates in the U.S. based on U.S. bond yields. Hayes believes that this is not something the U.S. government would welcome in an election year.

The Bank of Japan is one of the few central banks that can use the FIMA repo agreement, so Hayes believes that the U.S. will definitely step in to ensure that U.S. bond yields remain at lower levels to avoid a financial market disaster. The way to provide this liquidity is through the FIMA "printing money"!

Therefore, Hayes mentioned that this is why he is accelerating the conversion from pledging U.S. dollars sUSDe on Ethena to crypto risk assets. He also tweeted on 6/19 that he is increasing his positions in Pendle and Doge.