A big powerful “Minsky Moment” struck many investors, including me, around 10am EST on Monday when the last #BOJ intervention barely moved the needle in the FX market.
If you think the BOJ can simply hike rates to strengthen the $JPY, then you don’t realize that when a central bank falls into a “liquidity trap,” the interest rate levers they can pull to steer their monetary policy stop working.
The #BOE, for example, hiked rates up to 15% trying to save the $GBP from collapsing in 1992, but it didn’t work. Furthermore, beware that any interest rate is quoted on a yearly basis. This means that even hiking overnight rates to 100% (paradoxical example) doesn’t represent more than a 0.30% cost of capital per day. If you think that the $JPY can suddenly collapse 5 – 10 – 15% or more, a 0.30% cost is something you will happily shoulder.
Do you know what George Soros did when the #BOE quickly increased interest rates up to 15%? He increased his position from 1.5bn $GBP to more than 10bn $GBP! And he wasn’t alone, but the “Alpha” of many hedge fund “hyenas” that figured out the #BOE “lion” was vulnerable and could be attacked.
Back to today, how high do you think the BOJ can raise short-term rates to fend off a speculative attack? 1%? 2%? 5%? By the time rates are at 5%, three-quarters of the world sitting on ultra-leveraged $JPY carry trades will be dead, and the effects on the $JPY FX will be negligible because the #BOJ is stuck in a deep liquidity trap (TwitterX).
Come on, Dario, the BOJ has more than 1 trillion $USD of reserves they can use to fight back! Well… Monetary reserves are not that much different from nuclear weapons. Economically speaking, they are indeed a “deterrent” against other countries economic “threats” against its share of global GDP.
Before the “fiat currency” aberration, the power of a kingdom was measured in the amount of its #gold and precious metals reserves. These, when wisely managed, gave a country the “option” to finance a large army that could protect its commercial trading routes and interests abroad if they came under threat. So, effectively, a large amount of reserves was a powerful “deterrent” against other up-and-coming countries that wanted a piece of the wealth too.
What do you think is the power of your “deterrent” when you use it and it yields no effect, as happened a few hours ago to the BOJ?
Furthermore, when the Japanese government is doing all it can to dig a deeper grave for its country, like today’s proposal to cut corporate taxes so companies can use that money to raise wages by 8%, how many chances do you give to the BOJ house of cards to survive?
This latest government proposal is particularly asinine. First of all, with the global economy facing headwinds from every direction, do you really think corporates will pass the benefits of a tax cut to workers and not to their shareholders!? Furthermore, if the government claims inflation is 2% and Ueda keeps saying they are far from hitting their inflation goal, why do workers need an 8% pay raise? I’ll tell you why, because the inflation official data in Japan is fake (like everywhere else in the world, sadly)!
The US CPI is coming, another data that is so obviously “officially adjusted” in a desperate effort to convince people that the increase in prices they experience day to day is just a hallucination. The war in the Middle East is escalating, with Israel now quickly reinforcing the Lebanon border and US troops stationed in the region under constant attack. The US federal government might still shut down by the end of the week, and no one knows what to expect from the Iran “wild card”.
Personally, I don’t know how the BOJ can possibly withstand an attack on its currency in such a precarious national and geopolitical landscape, and I feel we will not need to wait too long to know how this is going to end!
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