MB: re: Japan/Yen situation:
1) "The Chinese are telling Clinton that if the yen hits 150 or worse, their promise not to devalue the yuan will be reconsidered. Since many analysts now think that 180 is inevitable if the situation is allowed to run its course, this is a serious threat."
Sounds about right. I can't think of any other reason why Rubin would say one thing, and do the opposite the next day.
2) "Japan is going to announce the formation of a bridge bank in the next few weeks to absorb something like $500BB of bad loans. Institutions using the bridge bank will be absorbed, together with their performing loans, by stronger banks. The LTC/Sumimoto talks are apparently the first instance of several to come."
Didn't the Japanese say almost exactly the same thing a couple of years ago, and nothing came of it? At this point, their credibility is so low, that I don't think anyone should believe them until we see deadlines, numbers, specifics. They've moved past denial, into bargaining, but are still a long way from acceptance. Over the last year, in every other East Asia country, when the debts were really added up, they came out to several times what had been publicly stated before the crisis. I'd be surprised if the 500B$ number holds.
3) "The Japanese have maybe one shot (possibly a second) to use their huge foreign capital reserves to enact a plan. That is, they have enough clout to reverse the current situation short-term, and don't want to waste it unless it is going to correct the long-term problem. They are VERY resistant to the kind of outside dictation of terms that the little guys have been getting from the IMF."
Those IMF terms have caused a huge amount of pain, a lot of political instability, and haven't fixed the problem. East Asia is no closer to a solution now than 6 months ago. A second round of devaluations is looking more and more likely. It's not surprising that the Japanese look at Korea and Malaysia and (most of all) Indonesia, and say "we've got problems, but that's not the answer". In particular, the idea of massive new government spending to prime the pump doesn't sound like it's going to work.
4) To support the bridge-bank plan, and to give the yen the short-term boost it needs to break out of the current momentum ("downward spiral") they will liquidate an enormous amount of US Treasury notes and other fixed-rate debentures denominated in US dollars.
5) "Do I need to tell you what the sale of say $500BB of dollar-denominated notes would do to the US economy? Interest rates would pop up (you can imagine short-term rates rising 50% in a week or two), the equity market would tank, cash and commodities would increase in value by a corresponding amount. Real estate would also fall (it would be hard to justify a rise in 30-year mortgage rates rising as much as short-term rates, but a rise to 9.5-10% is certainly conceivable and would hurt real estate prices)."
Selling those Securities over two or three years will cause no dislocations.
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