Despite official statements against rapid currency depreciation in Japan and Korea, policymakers likely view a weaker currency as a beneficial stimulus. With negative output gaps and competition from China, the goal is not to reverse the trend but to manage its pace to avoid market disorder and US Treasury scrutiny.

When national debt grows too large, an economy enters "fiscal dominance." The central bank loses its ability to manage the economy, as raising rates causes hyperinflation to cover debt payments while lowering them creates massive asset bubbles, leaving no good options.

Foreign inflows into Japanese equities are high, but the FX hedge ratio is only 14%, far below the 50% seen during the Abenomics period. J.P. Morgan estimates every 1% rise in this hedge ratio could push USD/JPY 3 yen higher, representing a significant and overlooked bearish catalyst for the yen.

A recent global fixed income sell-off was not triggered by a single U.S. event but by a cascade of disparate actions from central banks and data releases in smaller economies like Australia, New Zealand, and Japan. This decentralized shift is an unusual dynamic for markets, leading to dollar weakness.

'Fiscal dominance' occurs when government spending, not central bank policy, dictates the economy. In this state, the Federal Reserve's actions, like interest rate cuts, become largely ineffective for long-term stability. They can create short-term sentiment shifts but cannot overcome the overwhelming force of massive government deficit spending.

When government spending is massive ("fiscal dominance"), the Federal Reserve's ability to manage the economy via interest rates is neutralized. The government's deficit spending is so large that it dictates economic conditions, rendering rate cuts ineffective at solving structural problems.

Despite strong export-led growth in Asia, the benefits did not trickle down to households. Weak household income and consumption prompted governments and central banks to implement fiscal support and monetary easing. This disconnect between headline GDP and domestic demand is a critical factor for understanding Asian economic policy.

As investors sell US assets to repay strengthening yen loans, it pulls liquidity from the US system. If this happens slowly, it could gently deflate inflated stock prices without causing a crash. This orderly withdrawal is preferable to a sudden market rupture caused by bursting bubbles.

When countries run large, structural government deficits, their policy options become limited. Historically, this state of 'fiscal dominance' leads to the implementation of capital controls and other financial frictions to prevent capital flight and manage the currency, increasing risks for investors.