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In yesterday’s post The BoJ’s Turn I left off with the suggestion that the BoJ would disappoint and the USDJPY would initially tumble to 102.87, followed by a drop to 101.618. In the subsequent Update to USDJPY, I laid out my reasoning — which is no different from what I’ve been posting for the past year or so.
For years, the continually devalued yen supported the yen carry trade, which guaranteed that stocks in Japan and in key markets around the world would continue to appreciate.
The yen bottomed out (USDJPY peaked) last year because Japan could no longer afford higher oil and fresh food prices, which produced real inflation without any economic benefit. Both are almost entirely imported; fresh food prices soared over 12% between November and February.
If the BoJ were to further weaken the yen, it could only do so if oil prices were to continue falling to compensate. Since lower oil prices could ruin banks and big oil companies, TPTB had to make an unpleasant choice: support Japan’s exporters and the yen carry trade with a lower yen (higher USDJPY) or support banks and oil companies.
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