November 26, 2002, Tuesday.
The Maybach sedan carrying Seok-won sped along Olympic Boulevard toward Yeouido.
Dressed in a perfectly tailored suit and seated in a plush leather seat, Seok-won exuded such a refined atmosphere that a photograph taken of him at that very moment could have easily graced the cover of a magazine.
Tilting his head slightly, he gazed at the rows of apartment buildings stretching along the riverside across from him, while listening to the news about the Iraq War flowing from the radio.
[Until before the war began, it had been expected that fierce urban combat would unfold due to the desperate resistance of the Iraqi military and militias. However, once the war actually started, Baghdad was helplessly captured by U.S. forces within just three weeks of the outbreak of hostilities.
U.S. Marines who seized Firdos Square in central Baghdad placed a chain around the neck of the statue of Hussein, which had stood tall in the middle of the square as a symbol of the dictatorship, and draped it with the American flag over its head as a sign of victory.]
Everything that followed was so widely broadcast on the news that it felt vividly etched into memory.
When a U.S. armored vehicle dragged down the statue of Hussein with a chain, enraged Iraqi citizens who had been oppressed under the dictatorship poured into the streets, trampling the fallen statue with their feet and venting their fury. The scene was especially striking.
Some residents, still unable to quell their anger, even cut off the head of the statue, tied it to the back of an old pickup truck, and dragged it through the streets of Baghdad, as citizens cheered at the sight.
'Foreign media described this as a historic moment signaling the end of the dictatorship and the beginning of the era of U.S. military governance.'
Even at the Palestine Hotel, where foreign journalists were staying, U.S. tanks and armored vehicles pushed in, while the Iraqi military and militias—who had declared they would fight to the bitter end—either surrendered helplessly or abandoned Baghdad and fled.
Although the White House had yet to officially declare victory, the Iraqi ambassador to the United Nations acknowledged defeat, leading most countries to view the war as effectively concluded with a U.S. victory.
[Meanwhile, President Hussein fled the city just before the fall of Baghdad....]
Contrary to the expectations of many experts who had predicted it would become a Stalingrad-like battle for the U.S.-U.K. coalition forces, news of Baghdad's collapse the previous night—so anticlimactic in its swiftness—was sending shockwaves through the global economy.
At that moment, feeling a vibration from inside his coat, Seok-won took out his phone. After checking the name displayed on the screen, he immediately answered the call.
"It's me."
[Have you checked the closing figures of the New York stock market today?]
Still gazing at the scenery passing by outside the window, Seok-won replied in a calm tone.
"All three major indices, including the Nasdaq, recorded gains of over 2%."
[There is news that President Hussein, who fled after abandoning the capital Baghdad, is preparing a final resistance with loyal forces in his hometown of Tikrit. However, the market sentiment is that there is over a 90% probability the war will end by January next year.]
"Baghdad was expected to suffer tremendous casualties, yet it fell so easily without much of a fight—it's no surprise the market is reacting that way."
[Although we are still in profit after taking a short position at the peak, the rebound is strong, so I'm concerned that if the index continues to surge like this, our returns might decrease.]
Unlike Landon, who cautiously voiced his concerns, Seok-won responded in a relaxed tone.
"It's rebounding for now on expectations that the war will end quickly, but this momentum won't last very long."
Landon replied in a slightly subdued voice.
[As you mentioned before, even after the war ends, if instability continues and international oil prices surge as a result, the market's upward trend will eventually break and fall again.]
"That's part of it, but fundamentally, the global economy is already in a downward trend, and corporate earnings aren't strong due to the collapse of the dot-com bubble. Even if the negative impact of the war is resolved, the momentum will fade quickly."
[That makes sense. If there were at least positive developments like Iraq's post-war reconstruction, the upward trend might gain strength. But if instability continues as expected, even that would be hard to count on. In fact, considering that expectations for Iraq's reconstruction are already reflected in the current rally, it could later act as a negative factor that drags the market down.]
"More than anything, the biggest hurdle is the corporate earnings season starting next month."
[No matter how high expectations are, if companies report poor earnings, investors will immediately respond by selling.]
No matter how much corporate executives spoke of a rosy future during earnings briefings, if profits were weak in the present and rising international oil prices signalled an economic downturn, investors would inevitably try to sell their stocks and secure cash.
"So keep the position as it is."
[Understood. Ah, and an official named Yoshikawa from Japan's Ministry of Finance contacted us—he said he met with Branch Manager Porter yesterday.]
Seok-won's eyes lit up as he asked,
"You mean Yoshikawa Daiki, the official known as 'Mr. Yen'?"
[That's correct.]
As a bureaucrat with enough influence to lead exchange rate policy at the Ministry of Finance, Yoshikawa's involvement piqued Seok-won's interest.
"What did he want?"
[As you might expect, he asked us to unwind our short position on the yen.]
Seok-won let out a small chuckle.
"For a high-ranking Ministry of Finance official—famous for their arrogance—to say something like that in person, it seems the Japanese government must be quite desperate."
[Even with verbal intervention by the Ministry of Finance and the Bank of Japan, as well as direct efforts to defend the exchange rate, the dollar-yen rate has jumped 4.7% from 129.31 yen in September to 135.50 yen. Of course they're anxious.]
One might think it was an overreaction, considering the exchange rate had risen by only 6.19 yen.
The real issue, however, was that the yen was surging even as the Tokyo stock market was hitting new lows almost daily following the Japanese government's announcement of a large-scale plan to resolve non-performing loans.
As concerns spread that, if this continued, the economic downturn would deepen and push Japan into a prolonged recession, the situation was becoming increasingly troubling for the Japanese government.
[If the Japanese government hadn't been selling off its dollar reserves to buy up large amounts of yen, the rate would have already broken past 140 yen per dollar.]
"That's probably true."
[From our perspective, it's beneficial since the Bank of Japan is absorbing a significant portion of the yen we're selling through our short positions. But for the Japanese government, which has to convert dollars into yen at a loss, it must be infuriating.]
Leaning back against the leather seat, Seok-won allowed a faint smile to form.
"If the yen were to strengthen again, that would be another story. But given that they'll have to print massive amounts of yen to clean up non-performing loans, the chances of that are low. Every yen they buy will just pile up as losses."
[And if they focus on defending the exchange rate, the aggressive push to resolve non-performing loans could lose momentum. The Japanese government is, quite literally, stuck between a rock and a hard place, unable to move either way and just stewing in frustration.]
From the other end of the phone, Landon let out a sound of admiration.
[Even thinking about it again, the timing of entering the short position on the yen was absolutely perfect.]
Seok-won replied as if it were nothing of significance.
"To revive Japan's economy, which has fallen into a deflationary trap after the bubble burst, there's really no option other than reflation—expanding the money supply. Naturally, that makes it easy to predict a decline in the value of the yen."
Reflation was a policy measure aimed at artificially stimulating the economy by increasing the money supply without triggering excessive inflation, in order to escape a recession.
[Considering that interest rates are effectively at zero at 0.1%, there's little room left for the Bank of Japan to lower them further to stimulate the economy. As you said, to turn around an economy that's sliding into its worst state, the only solution is likely to issue large amounts of new government bonds and inject money into the market—thereby achieving the effect of a rate cut.]
The corners of Seok-won's lips lifted slightly.
"But even while printing yen, such a sharp surge in the exchange rate is definitely not the direction the Japanese government wants."
[While a weaker yen may benefit export companies, Japan's heavy reliance on imports for most raw materials—including crude oil—means rising import costs could end up triggering inflation instead of resolving deflation.]
"So while the Japanese government is reluctantly dumping dollars at bargain prices, we simply scoop them up, take a reasonable profit, and exit."
[If they abandon exchange rate defense here, the yen would spiral out of control. Even knowing their money is being drained by us, the Japanese government has no choice but to keep selling dollars—they must be grinding their teeth in frustration.]
From the Japanese government's perspective, it was a complete dead end with no escape.
Seok-won spoke coldly, his tone utterly composed.
"Isn't this situation the result of them dragging their feet and covering up non-performing loans because they didn't want to take responsibility? In the end, it's something the Japanese government brought upon itself."
[That's correct. Showing weakness first was their mistake.]
Before long, the car carrying Seok-won exited Olympic Boulevard and entered Yeouido.
"Did that official Yoshikawa try to threaten us—saying that if we don't unwind our short position, they'll pressure us using the SESC like last time?"
The Japan Securities and Exchange Surveillance Commission (SESC) was a government agency responsible for investigating and supervising unfair trading activities in the stock market.
While its role was similar to Korea's Financial Supervisory Service, it possessed far greater authority, including the power to conduct compulsory investigations—such as search and seizure with court approval, and even the confiscation of communication records.
Feared as a grim reaper of the Japanese stock market, it was an intimidating institution. Yet Seok-won showed no sign of tension, not even the slightest twitch of his brow.
Landon, too, responded in a relaxed voice.
[Perhaps because they had a harsh experience last time when they clumsily tried to interfere with us, they didn't bring that up this time.]
Seok-won stroked his chin, looking slightly surprised.
"Then what did they say?"
[They said that if we continue short betting, the Bank of Japan will use its massive foreign exchange reserves to go all out in pushing the exchange rate down.]
"So basically, since we've already made plenty before the yen strengthens again and we start taking losses, they're telling us to cash out and leave."
As the saying goes, even a ruined rich man can last three years—despite suffering from the burst bubble and prolonged recession, Japan still possessed the world's largest foreign exchange reserves, exceeding 469.7 billion dollars.
That meant if they were determined to pour those reserves into defending the exchange rate, even the Eldorado Fund would be forced into a very difficult battle.
"So what did Branch Manager Porter say in response?"
[He said that if they're confident, they should go ahead and try whatever they want.]
Hearing this, Seok-won burst into laughter.
"Haha! I knew it already, but Branch Manager Porter really does have a backbone."
[The Bank of Japan is certainly not an easy opponent, but frankly, if you truly decided to crush the yen, wouldn't it be entirely possible?]
Sensing the strong faith in those words, Seok-won gave a faint smile.
Of course, it wasn't wrong—but there was no reason to engage in a full-scale, bloody confrontation with the Bank of Japan when profits could be made easily through other means.
"If we had only bet on the yen, that would be one thing. But since we have money placed across various positions, it's better not to provoke them too much. Tell them to push it up to 140 yen as planned, then cash out and exit."
At that, Landon clicked his tongue slightly, sounding a bit regretful.
[Understood. It would be nice to use this opportunity to put the Bank of Japan in its place, but to do that, we'd have to pull funds from other positions, which would actually put us at a disadvantage.]
"We've already spread the board this wide—if we end up losing other opportunities just to fight over the yen, that would be foolish."
[You're absolutely right.]
After speaking a little longer, Seok-won ended the call. Even as he did, he wore a deep smile, thinking of the predicament of the Japanese government—fully aware of what was happening, yet still unable to avoid having its pockets picked by him.
TL/n -
The title "Mr. Yen" is most famously associated with Eisuke Sakakibara, Japan's former top currency official. Sakakibara earned the nickname in the 1990s for his strong influence over yen exchange rates and his outspoken views on intervention.