Japan (Almost) Comes Clean

Consider all the lies that central banks tell in order to prop up economies/banks/stocks. The Bank of Japan is, by far, the most prolific.  For years, they’ve held interest rates below zero – supposedly in order to boost inflation inflation to 2%. They’ve persisted in this strategy even as inflation spiked well above 2%.

Japan Inflation Rate

At the same time, they have engaged in massive currency manipulation – deflating the yen in order to stoke the yen carry trade that fuels the Japanese stock market (along with direct equity purchases by the BoJ and the Japanese National Pension System.)

The net result is a mismatch between inflation and interest rates that any freshman economics student could see is bonkers.

And, it’s happening while Japan’s national debt continues to soar.

Japan’s periodic spikes in inflation have been driven primarily by energy prices. Because oil is priced in US dollars, a plunge in the value of the yen causes the price of oil in yen to soar.

When it peaks, one of two things is required in order to prevent catastrophe: a rise in the value of the yen (i.e. a drop in USDJPY) or a drop in the price of oil. Both are normally quite detrimental to stock prices.

Recall that WTI reached our 130.50 target almost a year ahead of schedule thanks to Russia’s invasion of Ukraine. It has been ratcheting lower ever since – until this past Monday when it broke out of a falling channel and spiked above its 200-day moving average. The BoJ is understandably nervous.

When this nervousness resulted in the BoJ leaking a little bit of truthiness about their predicament yesterday, it essentially raised the upper bound in interest rates from -0.01% to +1.0%.  This drove the value of the yen much higher (driving the USDJPY lower) which poses a big threat to stocks.

It led to a sharp selloff in stocks at the close. If VIX hadn’t been hammered by almost 11% overnight, it would have continued into today’s session.

Will investors grasp the importance of a spike in the cost of the cheapest financing on the planet?

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