The primary key variable when it comes to determining the future direction of US market is no longer corporate fundamentals and technicals, nor the US economy itself, as much as the daily gyrations in the Japanese Yen, which defines the move in the S&P on a tick for tick basis. As such, what the BoJ will do is likely far more relevant to US capital markets (or the sad joke that passes for them these days) than anything the Fed can pull out of its hat. And while there has been much posturing out of various Japanese administrations that deflation will not be tolerated (presumably unlike the past 20 years), and that FX intervention is near, few actually believe anything coming out of the BoJ or the Finance Ministry these days. Yet looking at what domestic Japanese investors are doing may provide a better clue as to what is in store for the Yen. As Barclays points out, in time of heavy FX intervention, such as the last period between 2002 and 2004, Japanese holdings of foreign securities tend to surge: a good example being precisely that period, during which Japanese holdings of US Treasuries increased by $320 billion, to go side by side with a BoJ which was actively selling Yen and buying up Dollars. In essence, investors there were frontrunning (or at worst investing side by side with) the BOJ. And as weekly data demonstrate, Japanese investors are once again gearing up for intervention, having purchased $60 billion of foreign securities in July and $75 billion so far in August, the highest number in half a decade. While the BoJ's talk is cheap, Japanese investors appear to have decided that at prevailing JPY levels the BoJ has no option but to start its intervention regime.
Of course, another explanation is that correlation is simply not causation, and the higher the Yen rises, the more bonds Japanese investors will end up purcasing in a Catch 22, with or without an actual intervention. Which is precisely what the BoJ is hoping for. If today's action of a massive routs in Yen carry pairs is any indication, Masaaki Shirakawa achieved his ploy... at least for now. And just in case, the rumor has yet again leaked via Nikkei that the BoJ is once again considering an emergency meeting in which only one thing can possible be discussed. Alas, as the SNB has found out the hard way, today's speculators learn to call the bluff on central banks very quickly. Either the BOJ will follow through with action within a week, or the Yen will surge to fresh record highs.