Kyrgyzstan Risks EU Sanctions Over Russia Ties

A hot-button topic has emerged in Japan's lower house election campaign: using the nation's massive foreign currency reserves to pay for new policies. Prime Minister Sanae Takaichi brought the issue to the forefront, but analysts warn that tapping into this fund is more complicated than it seems.

During a campaign speech, Takaichi, who leads the ruling Liberal Democratic Party, pointed to a potential source of cash. "There's something called the Foreign Exchange Fund Special Account (FEFSA), and its coffers are brimming now," she said.

Both ruling and opposition parties are now eyeing this account as a way to finance their agendas.

How Japan's Forex Account Works

The FEFSA is the government's tool for managing foreign currency reserves and intervening in currency markets. Its operation is straightforward:

• To weaken the yen: The government issues bills to raise yen, sells that yen to buy dollars, and then invests those dollars in assets like U.S. Treasurys.

• To strengthen the yen: It sells its dollar-denominated assets to buy back yen.

The account generates profit primarily because Japan's interest rates have been lower than those of other countries. It earns higher interest on its foreign assets than it pays on the bills it issues. A weaker yen also boosts profits by increasing the yen-denominated value of interest income earned overseas.

A Record Windfall Fuels Political Ambitions

Japan's foreign exchange reserves stood at $1.37 trillion at the end of 2025, according to the Finance Ministry. This figure has been hovering around the $1.3 trillion mark since 2012, swelled by past interventions to buy up dollars.

Figure 1: Data from Japan's Ministry of Finance shows foreign exchange reserves have stabilized in dollar terms since 2012 while their yen-denominated value has continued to climb, highlighting the impact of currency fluctuations.

The FEFSA logged a record gain of 5.36 trillion yen ($34.5 billion) in fiscal 2024, the highest since financial disclosures began in fiscal 2008.

These profits already contribute to the government's general budget. Current rules permit 70% of the gains to be transferred. For fiscal 2025, 3.2 trillion yen was moved to the general account, with about 1 trillion yen allocated to defense spending. Under the existing framework, it would be difficult to extract more funds.

The Catch: Tapping Reserves Is Currency Intervention

While politicians talk about using unrealized gains from foreign assets, significant obstacles stand in the way.

"By the special forex account's very nature, converting its foreign currency assets to yen would be currency intervention, which imposes some limits on its use as a funding source," said Takahiro Hattori, a project associate professor at the University of Tokyo.

International norms permit currency market intervention only on a limited basis, typically to counter speculative swings. If Japan were to sell its dollar assets for domestic funding when no such crisis exists, it would likely face opposition from the U.S. and could reduce its capacity for necessary interventions in the future.

A Bipartisan Idea on the Campaign Trail

The idea of using the FEFSA is not limited to the ruling party. Opposition parties also see it as a potential funding source.

The Democratic Party for the People has proposed using investment profits and asset sales from the account, along with pension reserves and Bank of Japan-held ETFs, to fund proactive fiscal policy. Similarly, in last summer's upper house election, the Constitutional Democratic Party suggested using forex account gains to help finance a temporary suspension of the consumption tax on food.

Takaichi Clarifies Stance on a Weak Yen

Prime Minister Takaichi later elaborated on her comments in a post on X, stating her goal was not to praise a weak or strong yen but to "build a strong economy that is resilient to exchange rate fluctuations." She pushed back on the interpretation that she "stress[ed] the benefits of yen depreciation" but did not address her remarks about the special account.

As Takaichi noted, a weak yen has both pros and cons. It boosts the profits of Japanese exporters and can lift stock prices. However, it also drives up the cost of imported energy, food, and raw materials, fueling inflation. In recent years, Japan's export volume has stagnated even as the yen has weakened.

Investors are trading the nomination of Kevin Warsh for Federal Reserve Chair as if Paul Volcker himself just walked back into the Eccles Building. But is Warsh truly the inflation hawk his reputation suggests? The answer is far more complicated.

President Trump announced the nomination on January 30, 2026, positioning Warsh as a figure who can restore discipline at the central bank as Jerome Powell's term ends in May. The move comes after Trump's repeated criticism of the Fed's rate policy and independence, placing Warsh’s monetary philosophy squarely in the spotlight.

A History of Hawkish Warnings

Warsh’s record provides ample fuel for the hard-money narrative. As a Fed governor from 2006 to 2011, he built a reputation as one of the board's most consistent voices on inflation. Even as the 2008 financial crisis unfolded, pushing unemployment up and sparking fears of deflation, Warsh persistently warned that inflation expectations could become unanchored.

"Inflation risks, in my view, continue to predominate as the greater risk to the economy," he stated at the time.

After leaving the Fed, this view solidified. Warsh became a prominent critic of quantitative easing (QE), arguing that the central bank's expanding balance sheet distorted capital allocation and dangerously blurred the lines between monetary and fiscal policy. He has maintained that inflation isn't a random event but the direct result of excessive spending and money creation.

"My overriding concern about continued QE, then and now, involves the misallocations of capital in the economy and the misallocation of responsibility in our government," Warsh said in 2018.

This history triggered a classic hawkish reaction in markets upon his nomination. Gold and silver sold off, the dollar strengthened, and traders immediately began making comparisons to Volcker.

A More Flexible and Nuanced Stance

However, the full picture is more complex. In recent years, Warsh has also criticized Powell’s policy for being too restrictive and hindering economic growth. He has argued for both lower interest rates and a smaller Fed balance sheet, signaling a willingness to cut rates if accompanied by structural reforms.

This dual position has divided analysts.

• One camp sees intellectual consistency: They believe Warsh's goal is to shrink the Fed's overall footprint, which in turn creates the flexibility to ease short-term rates.

• Another camp sees political pragmatism: They suggest Warsh is adapting his views to align with Trump's well-known preference for lower interest rates.

The Volcker Comparison: Myth vs. Reality

The tension in Warsh's platform fuels comparisons to Paul Volcker, but the analogy has clear limits. Volcker, the Fed's 12th chairman, inherited runaway inflation in the late 1970s and broke its back by raising the federal funds rate above 20%, knowingly inducing a recession to restore the Fed's credibility. Warsh has neither faced such an extreme scenario nor indicated he would deploy similar economic shock therapy.

Furthermore, Volcker was defined by his staunch independence from political pressure. Warsh is widely seen as more pragmatic and attuned to political realities, making it less likely he would wage a public war against the administration that appointed him.

This doesn't make him a dove; it makes him conditional. While Warsh views inflation control as non-negotiable, he also believes productivity gains, particularly from artificial intelligence, could enable lower rates without stoking price pressures. If the economy delivers on that productivity promise, he may appear accommodative. If inflation surges, the hawk would likely reemerge.

Figure 1: The core debate surrounding Kevin Warsh's nomination is whether he would be an inflation hawk, a growth-focused dove, or a pragmatic hybrid, a contrast often framed against the legacy of Paul Volcker.

Market Implications of a Warsh-Led Fed

Markets are still trying to solve the puzzle. Fed funds futures are pricing in more rate cuts for 2026, even as traders prepare for a potentially faster reduction of the Fed's balance sheet. This suggests the market is bracing for a hybrid Fed—one that is structurally tighter but potentially looser in its rate signaling.

If confirmed, Warsh could also bring back an old-school communication style. This would mean less forward guidance and more emphasis on actions over promises. Such a shift away from verbal interventions could increase market volatility as traders adjust to a central bank that speaks less but acts more decisively.

Ultimately, Warsh is not a simple Volcker successor. He shares a skepticism of easy money but not an appetite for inflicting economic pain. For investors, the message is clear: ignore the simple labels. Warsh is neither a committed hawk nor a predictable dove. He is a pragmatist who believes in credibility and will likely respond to data, not dogma, making his tenure anything but certain.

Key Points on a Warsh-Led Fed

• Hawkish Credentials: Warsh has a long-standing record of prioritizing inflation control and opposing prolonged quantitative easing.

• Dovish Flexibility: He has recently supported lower interest rates, provided they are paired with balance-sheet reduction and productivity gains.

• The Volcker Parallel: He shares Volcker's focus on monetary discipline but likely lacks his predecessor's tolerance for extreme rate hikes and political confrontation.

• Potential Policy Mix: A Warsh-led Fed might combine faster balance-sheet runoff with targeted rate cuts and a less predictable communication strategy.

Source: Reuters

Czech Prime Minister Andrej Babis is calling for a significant overhaul of the European Union's carbon emissions trading system, arguing that reforms are necessary to curb rising energy prices. In a letter sent to the European Commission, the European Council, and leaders of all 26 member states, Babis outlined proposals aimed at protecting European industry.

The prime minister is actively seeking support for his position ahead of an informal EU summit on February 12, with plans to lobby leaders from countries including France and Italy.

Capping Costs and Delaying Expansion

The core of the proposal involves two key changes to the EU's Emissions Trading System (ETS). Babis insists it is necessary to cap the cost of carbon allowances "to prevent excessive price increases and the relocation of industry from Europe." He highlighted that current allowance prices have far exceeded earlier forecasts, placing a heavy burden on the region's industrial sector.

Additionally, the letter calls for delaying the next phase of the carbon market, known as ETS2. This expansion would apply the emissions trading scheme to buildings and transport. Babis has requested that its rollout be postponed until at least 2030. This comes after the EU had already moved the launch date from 2027 to 2028.

How the EU Carbon Market Works

The EU's Emissions Trading System is the bloc's primary policy tool for reducing CO2 emissions. Launched in 2005, the system operates on a "cap and trade" principle:

• It sets a cap on the total amount of greenhouse gases that can be emitted by covered sectors.

• Companies receive or buy emission allowances, which they can trade.

• For every ton of carbon they produce, industries and power plants must surrender an allowance.

This mechanism is designed to create a financial incentive for companies to invest in low-carbon technologies and shift toward cleaner production methods. On Monday, EU carbon prices were trading around 81 euros per metric ton of CO2, having briefly touched 90 euros in mid-January.

A Deep Divide Among EU Members

The proposal highlights a growing rift within the EU over its climate policy. While many factors contribute to Europe's high energy costs—including fuel prices, underinvestment in grids, and national taxes—the ETS has become a major point of contention.

Countries like Poland have long argued that EU carbon prices are excessively high and have called on Brussels to intervene. They contend that the market is being driven by financial speculation rather than genuine demand from industries.

However, other EU nations maintain that a strong carbon price is essential for meeting climate targets. From their perspective, the higher cost of emissions provides a critical incentive for the private sector to invest in the green transition and move away from fossil fuels.

Here we go again.

The government shutdown, which should be lifted in 24-48 hours once the House votes (we reported yesterday that Mike Johnson allegedly has the votes to pass the vote), is again jamming the machinery of government data reporting.

The BLS has pushed back the January 2026 jobs report, originally set for Feb 6, along with December's Job Openings and Labor Turnover Survey and Metropolitan Area Employment data.

"The release will be rescheduled upon the resumption of government funding," Emily Liddel, an associate commissioner at BLS, said in a statement. "Due to the partial federal government shutdown, the Bureau of Labor Statistics will suspend data collection, processing, and dissemination."

The Bureau of Labor Statistics will announce new release dates once funding is restored.

Source: Zero Hedge

A combination photo shows U.S. President Donald Trump and Indian Prime Minister Narendra Modi, the central figures in the announced trade agreement.

Former U.S. President Donald Trump announced on Monday that he plans to lower tariffs on Indian goods following a conversation with Prime Minister Narendra Modi. According to Trump, the deal hinges on India agreeing to stop purchasing Russian oil and instead potentially buying it from Venezuela.

The announcement marks a potential shift in trade policy, following months of pressure from Trump on India to reduce its reliance on discounted Russian crude.

Key Terms of the Proposed Agreement

Trump detailed the arrangement on his Truth Social platform, outlining specific commitments from both sides. The core components of the deal include:

• U.S. Tariff Reduction: The United States would lower its reciprocal tariff rate on Indian products from 25% down to 18%.

• India's Concessions: India would reportedly stop buying Russian oil, reduce its own import taxes on U.S. goods to zero, and purchase $500 billion worth of American products.

Trump presented the agreement as a gesture of goodwill, citing his "friendship and respect" for Prime Minister Modi.

Geopolitical Stakes: Ukraine and Energy Markets

Trump framed the deal as a strategic move aimed at resolving the conflict in Ukraine. In his social media post, he claimed the agreement would have a direct impact on the war.

"This will help END THE WAR in Ukraine, which is taking place right now, with thousands of people dying each and every week!" Trump wrote.

Since Russia's invasion of Ukraine in February 2022, India has become a significant buyer of discounted Russian oil. As many Western nations sought to isolate Moscow financially, India capitalized on the lower prices to build up its energy supplies, providing Russia with a critical source of revenue to fund its war effort.

Background on US-India Trade Relations

Historically, the India-Russia relationship has been more focused on defense than energy. Russia has long been the primary supplier of military hardware to India, while accounting for only a small fraction of its oil imports before the war.

The recent energy trade has been a point of contention. In June, Trump announced a 25% tariff on goods from India, along with an additional import tax, directly citing the country's continued purchasing of Russian oil. This new deal, if realized, would reverse that policy, despite Trump and Modi having maintained a historically warm relationship.