The Bank of Japan has kept interest rates at or below zero for years. Their bet was that the suppression of interest rates (by purchasing Japan’s net issuance, the BoJ now owns over 50%) would offer sufficient protection against both inflation and the 263% debt:GDP – exacerbated by the rapid depreciation of the yen.

Investors, including yours truly, have had their doubts. While effective at propping up equity prices [see: The Yen Carry Trade Explained], the yen’s plunge greatly amplified food and energy price increases. Inflation reached 3.6% in October.  It seemed as though something would eventually have to give.

It just did.

The BoJ just announced that they would allow rates to move to as high as 0.5%, sending the 10Y soaring from 25 to 42 bps…

…and the USDJPY plunging (yen strengthening) by 3.3% – below its 200-day moving average for the first time since Feb 2021.

The BoJ is essentially betting that the small increase in rates will

continued for members…

So far, the NKD has given up about 3% of its value, backtesting its original falling channel from 2021 as well as a TL off the Mar lows.  The big question is now whether or not the backtest will hold.Since the yen carry trade is such a huge element of global equity prices, US stocks are taking a hit as well.

This should help the Dow reach its SMA200 in the very near future. As with the NKD, the question is whether the backtest will hold.

The bigger picture shows the USDJPY recently completed two Inverted Head & Shoulders patterns that targeted 173ish – a level that would send inflation through the roof.Zooming in, we can see that the pair is currently backtesting the white flag pattern. If the BoJ is serious about preserving the NKD’s breakout and holding 26,000, this would be the extent of the USDJPY’s selloff. It they allow the yen to strengthen further, then there’s potential to 125.84 (the Jun 2015 highs and purple neckline) and, if that should fail, to 120.11 (the white .618, purple .786, and red neckline.)

The BoJ’s bond purchases will increase.  Count on it – regardless of how much the yen strengthens. Once the initial shock of the ceiling moving from 0.25 to .50 bps wears off, the yen should continue rising to whatever extent the BoJ decrees in order to keep the tops spinning.

Meanwhile, the EURUSD and DXY are holding their own…

…and VIX is “breaking down” just enough to keep SPX positive.

Stay tuned…

  *  *  *

BTW, I will be out of the office this Friday the 23rd and Monday the 26th.