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Japan Won't Sell Treasuries, They Will Buy More

|Includes: DXJ, FXY, SPDR Gold Trust ETF (GLD), TLT, UUP, YCS

This is a chart popular with gold bulls. It shows the growth of gold in the reserves of the Eurosystem thanks to price increases.

When gold peaked in 1980, the value of U.S. gold reserves exceeded M1. The U.S. could have retired all of M1, swapping it for gold, and still have over half its gold reserves remaining.

Japan doesn't own gold, but it does own a lot of U.S. Treasuries. If their efforts to generate inflation do lead to a major yen devaluation and subsequent hyperinflation, the US Treasuries on their balance sheet will start looking like gold does in the Eurosystem. Particularly since a yen devaluation will probably be supporting a U.S. dollar rally through reflexivity alone. That is to say, the yen will be devaluing against everything, but it will devalue the most against the U.S. dollar, which will be in a bull market (ignoring gold). Japan may even step up Treasury purchases if it wants to devalue against the U.S. dollar.

As long as a country has reserves, we can forecast a limit to currency devaluation. As we saw with the U.S. gold reserves in 1980, at some price gold reserves are enough to cover M1, M2, M3 or whatever you want to use as your target.

Since Japan does not have significant gold reserves, they need something, and the something they have includes a lot of U.S. Treasuries. Toss in the geopolitical angle (U.S. guarantees Japan's defense and conflict with China gets closer each day) and there's little chance that Japan will be a net seller of Treasuries. They may stop buying more, or they may print yen to buy more Treasuries, but they won't sell.

Japan is too big to bail. The government wants to be a seller of yen, not foreign assets. And they need reserve assets and do not own gold. In sum, they are in no position and have no desire to sell their dollars.