FX markets just opened and the market's reaction to the in-the-bag election of Shinzo Abe is 'expectedly' negative for the JPY. Trading up towards 84.50, JPY is back at 20-month lows against the USD with 85.50 the next target. With JPY weakness and the long-end of the Japanese sovereign bond curve at its steepest on record, it seems Abenomics 2.0 may be about to prove out the Keynesian Endgame. As Kyle Bass noted in the past, from the mouth of a Japanese finance minister "It's only money printing when the market says it is" - well, we suspect the market is getting the joke, finally.
USDJPY (higher = weaker JPY)
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as the skew in USDJPY FX options (3m R/R on the chart below) moves to record highs biased to expectations of further JPY weakness. Notice the correlation between the underlying and the risk-reversal has been high this year as options price in further weakening - very different regime from the 2009-2011 period...another relationship snapping back to reality...(the red oval shows a period where USDJPY was strengthening but options traders were increasingly betting against that strengthening trend)
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JGB Yield Curve slope (30Y - 10Y) - higher = steeper
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It seems the two are recoupling...
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