Reading · Across The Spread

Just a quick heads up - PM Takaichi is scheduled to hold a press conference later today at 10:30PM Japan / 1:30PM GMT / 8:30AM US EST, following her reappointment as PM in parliament earlier today with her single-party supermajority (which is more than ¾ of Lower House seats including LDP’s coalition partner JIP).

Note that the Takaichi government is already planning on giving four speeches in Parliament on Friday Feb 20, which, according to multiple media outlets who were given the speech draft in advance, will lay out fundamental reforms to the national budgeting process and approach that the Takaichi administration plans to enact, while carefully minding markets (JGB and JPY) - and therefore Feb 20th will be of far greater significance than whatever comes a bit later today.

The reason I’m flagging this late night Tokyo press conference upon the convening of the extraordinary Diet session and Takaichi’s “second cabinet” (same people reappointed as is) is because of this - dropping at 5AM this morning:

So, apparently, this US-Japan “trade deal” is going forward - Japan to invest / fund $550 billion into US-directed projects, and “in return” gets a mere 15% tariff on exports to the US, kicking off with Ohio-based gas-fired power plant, deepwater crude in the Gulf of “America” (Trump saying “LNG facility” is apparently a mistake that was corrected and confirmed by both Lutnick and Akazawa), and a critical minerals plant in Georgia.

As remains the case, any real detail is completely lacking from either side - like, how much of the $550 billion is this first chunk taking down? And - who exactly is “Japan” referring to with these 3 particular projects?

Is it Japan Inc? Or is it Japan sovereign?

Not only do those extremely basic questions matter if you (both Trump and Takaichi) are going to suddenly tweet things like this out - but I would have to expect that this would be a topic that comes up in this press conference. This very first order of business in this newly constructed Takaichi government.

These questions/answers matter most for FX (if addressed or given detail) - because “Japan $550 billion → America” can mean anything from half a trillion dollars of yen selling / dollar buying, to no FX converting (its not the former).

If its Japan Inc’s capital - the capital that isn’t being repatriated back home - they presumably have USD funds in their coffers (an non-FX-converting example).

If its Japan the government - then they’ll likely fund via JBIC (Japan Bank for International Cooperation) - who essentially issues bonds that are backed by the Japanese government to support Japan’s overseas endeavors. And although said bond issuance can be JPY-denominated, they often issue non-JPY denominated bonds (like USD denominated debt) to fund their projects. And yes, that’s Japan government guaranteed USD bonds.

Either way, just a heads up. May be nothing, may say nothing, and may be the start of a “I don’t have to face an election for years, so I don’t give a F….” new approach in the already outspoken manners of now the world’s most powerful woman, if not G7 leader.

Timing is also very curious - or coincidental. But if the NY Fed, directed by the United States Department of Treasury, did indeed conduct JPY rate checks that slammed USDJPY down before breaking 160+ and potentially not-hand Takaichi an LDP supermajority - well, perhaps this is in part why the US government would do such a thing. Takaichi’s LDP is a government that Trump and Bessent (and Lutnick) can work with - anyone else, no.

So, sub-160 USDJPY is the self-governed upper ceiling on USDJPY for now.

But the bottom seems to be a bit above 152 (as I wrote in my last note).

So, why now - as in, why hit Truth Social at 5AM JST on the day of this new Takaichi regime, frontrunning the day’s procedures? Why 10:30PM Japan time press conf from PM Takaichi? Well, the latter is because it seems quite clear to me that Washington and Tokyo need to touch base once more. And why the 5AM JST today, rather than say tomorrow at 5AM?

Might be because they (“they” as in - everyone involved on both sides of this US - Japan top down state-driven cross-Pacific “Make Japan Great Again By Making America Great Again” - from MOF Katayama to Bessent) also recognize this is near term lower band of USDJPY trading range - and none of “Japan owes United States half a trillion, and needs to be wired in 45 days” sounds like net-JPY buying.

So, this may very well be US/Japan officials acknowledging near term floor on USDJPY - where JPY goes a bit further in USD-priced… things, and also because if they tweeted this out at USDJPY 159.60, then another “NY Fed rate check on JPY” may be needed.

And yes, stay tuned for my part 2- which I indeed had to completely revamp given the scale of Takaichi’s win.

Some near term cross asset market charts in the meantime.

Equities: the only reason NDX is barely alive is because NKY is holding its otherwise lifeless body afloat - but there are cracks showing in NKY, which has outperformed NDX by 17% in less than 2 months.

Additional FX:

USDJPY 152 support / 160 resist.

This isn’t an “either” USD weak or JPY strong phenomenon- this is both USD and JPY weak. Look at EURJPY, GBPJPY, CHFJPY etc. US and Japan - world’s worst currencies - which move on Japan developments and headlines.

JGB vs UST Yields:

Simple - and revisit my prior work if you need to.

Short end is risk #1 of 2 for world’s most dangerous market → funding constraints - as 5Y and shorter is where MOF Katayama is packing JGB issuance.

Long end is risk #2 of 2 for world’s most dangerous market → market functionality +25bp intraday spikes on long-end JGBs are not fiscal, they’re functional. Why in the hell are they slammed -25bps back down instantly the next day if it were fundamentally fiscal.