This page has been archived and commenting is disabled.
Pricking the Bubble in the Yen
Analysts have been puzzled by the relentless appreciation of the Japanese yen, which tickled ¥80.20 last week, and seems poised to break out to the ¥70 handle and an all time high. Having written the authoritative tome on the Japanese banking system 30 years ago (it’s in the Library of Congress), I can shed more than a little light on why.
Unknown to most in the trading community, foreign banks have engaged in a massive recapitalization of their Japanese subsidiaries since over the last six months. Since May, excess foreign bank reserves held in yen have soared from $246 billion to $562 billion, an increase of a staggering $316 billion, creating immense upward pressure. Some $136 billion of this poured into the yen in September alone. By comparison, there are only $7.3 billion worth of net longs held in futures markets by speculators.
Ask Japanese senior bankers why this is happening, and you get lame excuses, like anticipation of stiffer capital requirements from the Bank of Japan to head off any future financial crisis. The truth is that foreign banks are using their balance sheets to speculate in the currency markets and boost profits. Adding fuel to the fire has been efforts by the People’s Bank of China to diversify out of the dollar as a reserve asset by pouring new cash flows into the yen. This is showing up in a huge jump in overnight bill purchases by foreign investors.
In days of old, countries used to destroy their neighbors by sending in invading armies of screaming warriors swinging great long swords. Today, you simply buy their currency; drive it to ridiculous heights, making its industry hopelessly uncompetitive in the global market place, thus collapsing its economy. This is what China is doing to Japan today.
This explains why the central bank’s intervention efforts to slow the yen’s appreciation have been an abject failure. In September, total BOJ sales of yen amounted to only $61 billion, and has been spread among a range of lower tier assets, like “BBB” rated corporate bonds, exchange traded funds (ETF’s), and REIT’s. The Japanese government is slumming with its own version of QEII. But the amounts so far are miniscule compared to the inflows. They might as well be pissing in the ocean.
There are two ways this kabuki play will end. The obvious one is for the BOJ to boost its intervention to the $1 trillion that worked the last time it was in this pickle eight years ago. I sense that a Pearl Harbor type surprise attack of this sort is setting up. Suck the shorts in with a series of small, ineffective interventions that invite laughter and derision, and then all of a sudden, its tora, tora, tora and bombs away. The shorts get taken to the cleaners.
The second approach will be more subtle. Banks are currently earning 10 basis points on their excess reserves. Turn this number negative, as Germany and Switzerland did, and the banks will bail on their excess reserves in a heartbeat. It’s not a matter of if, but when they do this. Then the 15 year double top chartists have been waiting for will be in place, and one of the great shorts of the decade, and the (FXY) and the (YCS) will be in play. This all may happen very fast, so keep you finger poised over that mouse.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
- advertisements -
http://www.boj.or.jp/en/type/stat/boj_stat/ecabs.pdf
Your source isnt far off on the size but he's wrong that this is a reason for selling USDJPY
The attached file is about BOJ Current Account Balances by Sector. On the top right, you can find out the how much the excessive reserves by foreign banks have grown in the last one year. It is true that it has dramatically increased but they are not selling USDJPY in spot FX to do this but they are swapping their home currency into JPY using FX forwards to take advantage of the basis. 3m cross currency basis in USDJPY is roughly 25bps and interest rate on excessive reserves at BoJ is 0.10%. Basically they can raise free JPY funds by via FX swap to park them at almost a risk free 0.10% deposit. 3m x-ccy basis was much wider before but it has compressed in the recent weeks so this structure is becoming less attractive. Also foreign banks will probably have less appetite to own non-mother currency into the year end. I think the pace of accumulation of reserves will be slower from here or even they can pull some money out.
Anyway it doesn’t have any impact to the Spot USDJPY.
Having written the authoritative tome on the Japanese banking system 30 years ago (it’s in the Library of Congress)
Namely?
Useful observations by the author and commenters that seem to conflict, ie buying USD with a Trillion dollars of yen like the Chinese do with their Renminbi Yuan to keep it in parity with the dollar, versus saving face by keeping the yen strong
The Japanese have perhaps the most orderly markets in the world with the consummate neoKeynesian zaibatsu government, and we have seen what 20 years of neoKeynesian mercantilism policies with an aging homogeneous population can accomplish, namely stagdeflation with the world's second largest reserves (third largest if UAE sovereign funds included)
An officer of one of the Big4 Zaibatsu said the Japanese had 1000-year time horizons in their planning
Not sure how the Yen is a bubble with all those reserves or that timeline
Maybe the more important question is, why try to control currencies at all?
Why not give the invisible hand of the market its due and let Japanese trade surpluses increase the value of the yen to increase imports and reduce exports?
The Japanese worked hard and long after WWII for their prosperity and are entitled to enjoy the fruits of their labours
For what its worth, a different Big4 in the currency markets is short the yen and long the dollar
Congrats on TBT from 29.77 to 37.48 (after 75 to 29.77)
your source was basically wrong about the size:
http://seekingalpha.com/article/233265-another-piece-of-the-yen-puzzle
data is here:
http://www.boj.or.jp/en/type/stat/boj_stat/ecabs.pdf
where does 516bn come from?
http://www.bloomberg.com/news/2010-10-26/foreign-lenders-reserves-at-ban...
is it more like 57bn?
Yens going to 50 to Dollar not other way...Japs won't like it but traditional Exporters are going get trimmed back a plenty in trade surplus game..especially with help of best of enemy China.. who will also want a couple of car and electronic goods champions to have a slice of global action.
I wonder about the plausibility of this idea given that the Japanese don't take to derision very well, much less self-imposed shame.
Excellent point, which all these paper tech traders miss. They see their charts and cant see the forest. Japanese do not default. Yen higher.
I don't know about that, either...
With this round of QE, the Fed should be able to recycle enough dollars to put a floor under the USDJPY pair, perhaps using nefarious means to accomplish this such as fighting back against the Chinese who are warping the true worth of the yen (some would say for nefarious purposes themselves...).
If the Japanese wanted to make a dent and truly punish the shorts, they would buy on USD strength and defend that level. This would take years to do. Bankers shouting, "Bonsai!" then throwing a trillion dollars into the worm-hole just doesn't sound very Japanese to me.
Look for either a USD rebound to much higher levels (~89...) or for the pair to sit and churn at these levels for months on end.
:D
Eisuke Sakakibara, Japan's former FM has been saying for months that the Yen would continue to strengthen against the USD returning to historic highs and stay there........if you and Sakakibara are right about the Yen sitting and churning for months then some nice low risk short term trading opportunities upcoming.
RR do you use the PVC the same way I do ala Pirates of the Caribbean?
Looking foward to it!
Oooh. This means I gotta get some more silver, and PVC pipe.
So what is the silver for?
"Analysts have been puzzled...." They have been puzzled because they are not looking at all the factors. Once they examine everything they will discover the Yen is the place to be. Long FXY.
And this is exactly why you CAN'T have a fiat monetary system, money must be a stable base for the economy otherwise your building castles on sand
Nobel Prises have been given on the study of money, it's all bullshit, economy should be about supply and demand not the medium of exchange therof