The Global Forum of Japan (GFJ) E-Letter

　　January 2020 started with acute US-Iran military tension. Fortunately, it did not lead to hot, real war. When the Iranian government mistakenly shot the Ukraine International Airline flight 752, close connectedness among Russia, Ukraine, and North Korea has been revealed to the public, as the freighter was reported to be Russian made, and the parts were North Korean. After the dissolution of the Soviet Union, Ukraine continued to develop the nuclear enrichment activity of Iran, which is linked to North Korea.

　　The United States strengthened the economic sanction against Iran. The US changed the game plan from nuclear warfare to money warfare, as it is more economical and effective. The Wall Street Journal article dated on December 4, 2019, reported Iran's inflation rate at 36%, and 70% fall in oil export despite the Iranian government's devaluation carried out in July 2018, by cutting four zeros from the national currency rial. Iran's equity market and real estate prices plunged sharply, and the credit market tumbled. A hike of gasoline prices, caused by tougher US sanction, pushed more outraged protesters on streets for anti-government demonstration.

　　The article notes that the International Monetary Fund estimates Iran's foreign currency reserve to be $86 billion (JPY 9.3 trillion), and currently Iran could be able to access to only 10% of those cash reserves. If they were able to access fully though, Iran still needs to use 20% of that to keep its exchange rate stable in 2020. The central bank would be able to provide less than a year worth of import.

　　Amid the exhaustion of running out of cash, Iran would have only two choices: 1) to return to the nuclear negotiation table (towards peace), or 2) to attack US allies and global energy supplies (initiating war). Last year, Iran acted tough as seen in its attack on Saudi oil refinery. Then President Trump ordered the assassination of Commander Soleimani. This US act must have made Iran to reconsider retaliation against the US. Iran may possibly be induced to decide option 2) over 1), meaning that Iran would return to the negotiations.

　　Such US conduct against Iran could become a strong deterrent to aggression from North Korea and China. Last year, North Korea widely spread that "the US should negotiate with us by the end of year, otherwise...". But nothing happened so far and North Korea has been quiet since the New Year. China has also been quiet since Tsai Ing-wen won landslide victory on Taiwanese presidential election. China is focusing on the first phase of trade negotiation with the US.

　　As seen, US financial power seems to work more effectively and efficiently than its nuclear power on its international negotiations. The important issue is how the US financial market, the source of the financial power, could be effective and how long it could be sustainable. Markets fluctuate between 'fear' and 'greed.' Market participants take risks aggressively with greed. If they turn from greed to fear, they quickly flee from risk assets and move to safer assets.

　　CNN presents "Fear & Greed Index", that showed extreme 'fear' dominated at the beginning of 2019, but such mood oscillated to extreme 'greed' a year later (beginning of 2020). What would be the trigger? Sudden spike of volatility is the real risk to the international society and global financial markets.