Charles Schwab Has 7 Trillion Reasons To Study Japan

Why Investors Should Look to Japan for Clues on Charles Schwab’s Troubles

Charles Schwab Corp. has been making headlines recently, and none are good. With over $7 trillion in assets, it’s no surprise that investors are starting to worry. However, the real clues to Schwab’s troubles may lie in Japan. Japan is also grappling with similar economic change as the world adjusts to the Federal Reserve’s aggressive tightening cycle. In this article, we’ll explore why investors should pay close attention to the happenings in Japan.

The Consequences of the Fed’s Rate Hikes

The Federal Reserve’s recent rate hikes have hit Silicon Valley Bank and Signature Bank hard. The fallout is beginning to spread across Asia, with worries that Schwab may be next. Like many other financial institutions, Schwab invested in longer-dated bonds at low yields in 2020 and 2021. However, Schwab was left with significant paper losses as the Fed continued to raise rates. As of March 2022, those losses totaled over $5 billion. By the end of 2022, that number ballooned to more than $13 billion. This situation resembles Japan’s after their quantitative easing program began in 2000.

The Lessons from Japan

Kazuo Ueda is set to take over as the Bank of Japan’s governor on April 8. One of his primary tasks will be to attempt to normalize monetary policy without damaging the Japanese economy. The decision to pivot away from over 20 years of quantitative easing has created great anxiety throughout Asia. Japanese investors have relied heavily on the free-flowing yen liquidity that was a product of QE, and the thought of tapering – never mind a rate hike – is causing consternation. In December 2019, outgoing BOJ leader Haruhiko Kuroda attempted to test the waters by allowing 10-year yields to rise to 0.5%. The result was chaos in global markets, with the yen skyrocketing and US Treasury yields surging. The aftermath highlights how dangerous it is to mess with the so-called yen-carry trade, which has become a prime investment strategy. Anytime the yen fluctuates significantly, global markets become unstable.

Related Facts

• The Bank of Japan’s quantitative easing program began in 2000 and 2001.
• Since the BOJ pioneered QE, Japan has become the world’s largest creditor nation.
• Japan’s yen-carry trade has been a critical funding strategy for investors in higher-yielding markets worldwide.

Key Takeaway

Charles Schwab’s troubles indicate broader issues in the global capitalist system. The fallout could be catastrophic as the Fed and other central banks attempt to normalize monetary policy. Therefore, investors should closely monitor what’s happening in Japan, as that nation’s experience could provide crucial insights into how the situation may play out.

Conclusion

The similarities between Charles Schwab’s situation and what’s happening in Japan should not be ignored. As the global economy shifts, investors must monitor developments worldwide. Charles Schwab has over $7 trillion in assets, making it a potentially significant player in any financial crisis. By studying Japan’s experience with quantitative easing, investors may be better able to prepare for a tumultuous few years.