CC:
Glad to have you involved in the discussion of where the inscrutable nation now goes with its heavy problem load. Welcome aboard.
I sounds like we both agree that the big flows from Japan are extremely important to the continued health of the U.S. stock market, so it becomes a discussion on whether that flow continues or not.
I agree with your point that rates up equals Nikkei and banks down, and that this is ugly medicine. I also agree that rates may have to move up substantially to keep the dough at home. For me, it comes down to the question of which of the "lesser of inevitable evils" the Japanese choose. With U.S.$30.0 billion flowing out per month, (and it is the Bank of Japan that provides the conversion from Yen to dollars), this exodus rate simply cannot be sustained. The pressure on the BOJ is already such that whether they want to or not, and whether Greenspan likes it or not, a treasury repatriation is already underway. The proof of that particular pudding is the remarkable "hockey stick" formation found in the "Accounts held by the Fed for Foreign Central Banks". The powerful purchasing of treasuries by foreign central banks of the last two years has not only ceased, it has reversed. It reversed at exactly the time when the Japanese difficulties were mounting late in 1997. Additionally, the traders are no longer very circumspect and talk openly about the Japanese selling pressure.
Another point of agreement is that this whole thing is not related to liquidity, at least not at the big picture level where liquidity has been dumped into the system in abundance. As noted in earlier posts, there's plenty of evidence that the Japanese banks are recalling small/medium business loans to rebalance after the big bang (the 8% equity requirement). This has done much damage to the small business community, and has just added to the resolve of the average Japanese citizen to save even more and spend even less.
Our disagreement probably centers on which entity within the Japanese government will make the decision. I think it's made by the BOJ. The BOJ can't allow the currency to just continue to exit and it can't continue to disperse its reserves. If there is some other way to solve the problem other than an interest rate hike, no doubt they'll happily employ it, but with offshore rates so enticing, I don't see any other weapon.
Lets keep this discussion going as to me it is one of the most important subjects in the current environment.
Best, Earlie |
