Kuroda to Yellen – “You did this!”

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Kuroda and Bank of Japan have every right to put the blame of a strengthening currency pair JPY:USD firmly in the U.S. Fed’s and Yellen’s lap.

I do not have an interest in the currency pair but I hazard a guess that it will hit 100 Y to 1 USD.

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This is the 12 hour chart.

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This is the monthly chart. Both courtesy of XE Charts

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I can understand Kuroda and BoJ angst.

Gross Quantitive Easing to deflate the value of the Yen – principally to arrest the 25 years of deflation under the low interest rate regime.

Create growth – create jobs – inflate asset prices and – to not deflate.

Basically to export Japan’s deflation to its trading partners – simple.

The problem with a strong currency for Japan – is that all exports become difficult – due to the higher cost borne by their trading partners – especially motor vehicles and electronics.

This then induces manufacturing – to compete – to go offshore – increasing unemployment within the country.

Why is the US Federal Reserve and Yellen to blame for the dilemma of the stronger Yen – after the massive Quantitive Easing undertaken by the BoJ and thereafter negative interest rates?

On paper this should have worked.

Then again everything is fine in theory – just ask one Larry Summers who advocated negative interest rates.

The US Federal Reserve and Yellen are not acting independently – in the interests of the global reserve currency that is – they are acting in the interests of the debt engorged countries who cannot afford to pay interest.

By doing nothing on interest rates – Yellen has created a clusterfuck for Japan and to a lesser extent Europe.

Remember that the US Governments actions in 2007 through to 2014 was the catalyst to keep the USD low against all other currencies.

In other words – they created this mess – low interest rate regime and massive Quantitive Easing.

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Japan (BoJ) and Europe (ECB) – together with all other participants in these currency wars – are only following that course set by one Ben Bernanke – US Fed.

And now as I understand it – the US being the largest currency manipulator for those 7 years – yes seven bloody years – are warning China, Taiwan, Japan and Germany (as the major economic influence on the ECB) not to manipulate their currencies.

Like ?????? – how about w.t.f. – note trying to keep the bad language down – this is hypocrisy at its finest.

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Then again – what is new from these arrogant – self interested – self obsessed – turds?

US of A – The Hegemon.

To all those that do not understand Negative Interest Rates – and my call of 100Yen to 1 USD – please let me explain.

The BoJ’s Quantitive Easing program was a dismal failure – more so in light of the decline in global trade and the aftermath of the huge Chinese financial stimulus program – to boost their economy in 2008.

As the QE program was not working – having the desired results with the currency – the BoJ introduces negative interest rates to deflate their currency further – in particular the JPY to the USD – it started to work.

In fact both the QE and negative interest rates worked to the tune of 39.43 percent since 2012.

Negative interest rates – below a certain level – completely lose their impact on an economy  – and that reason is obvious – in that the commercial banks cannot lend funds at negative interest rates – they would lose monies – it is not viable.

Central banks do not deal with the private sector directly – they need commercial banks to implement their monetary wishes – and therefore it is a tad difficult to be a commercial banker in this environment.

Commercial banks cannot pass negative interest rates on to their loans and therefore they have to absorb the losses. (** see below on existing variable interest rate loans).

Lending at zero interest rate for commercial banks makes little or no sense – there has to be a ‘profit’ margin to cover administrative costs.

So – Commercial banks can choose between lending at positive interest rates – or not lending at all.

If they choose the latter scenario – and do not lend – then this will do more harm to the economy.

Central bankers know this – but the impact is primarily a short term deterrence to invest in the currency – if you do – then you pay for that privilege.

Negative interest rates real impact – is deflation – but as is now shown with the JPY:USD – it cannot be maintained for a long time. In fact the initial impact of the significant deflation is exported within a month of the policy being implemented.

Then the domino effect on the trading partners – a reduction of spending – they then have a deflationary impact on their economy over time – requiring their currency deflation through say a reduction of interest rates.

And so it goes on – and on – through each trading partner rendering the whole negative interest rate program futile.

Japan has a huge economy – and like China have strong external investments in US Treasures – the Yen is now the currency of choice.

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This chart says it all – Japan’s holdings of US Treasuries cannot be ignored.

They have little or no internal conflict and their borrowings against GDP (around 230 percent) are nicely hedged in US Treasures.

Nice one Kuroda and all prior Governors of the BoJ.

So – in case you miss my point – capital will not invest in USD – Euro or GBP – Yuan.

Each has a problem in that the U.S. refuses to normalize interest rates – Europe has huge internal political and economic conflicts – the U.K. has Brexit – and China – well what can be said for China – enough said already.

Capital seeks safety and the currency of choice is none other than the Japanese Yen – excellent cheap value – capital gain anyone?

Please also note that the Japanese Yen rose against the dollar after the financial crash in 2008 – it is just something about the conservative policy employed that is a safe haven.

 

(** Note on Existing Variable Rate Loans)

The single issue that I enjoy when a Central Bank implements a negative rate policy is the existing variable rate loans.

Interest is usually recalculated regularly – based on the resident Central Bank’s advertised – formal interest rates – and as this includes a small margin above borrowing costs – the results always in the borrowers favor.

Imagine a 2.0 or a 2.5 percent margin fixed on a 30 year loan on this advertised rate – yes already a low interest rate environment – and Banks would be smarting.

And no – we are not talking about one customer here – we are talking 1,000’s and 1,000’s.

 

Whilst I am on Japan – do not invest in Japanese  Banks

 

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Edit: 35 to 39.43 percent

 

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