Japanese interest rates don't have much to do with flows. For decades there has been the large flow of dollars towards Japan to buy stuff. The Japanese can't spend our dollars internally. They have to factor them into our T market, into projects in the US, into alternative currency conversions, regardless of the yield on yen denominated bonds. Several months ago Japanese private banks started converting non-dollar sourced yen assets into dollar denominated securities mainly US T-bonds. They didn't do this because of disintermediation, they did this because they were trying to get the dough out of the country before the real estate bad loan and debt tower fell. The expectation was that the yen would collapse and then they could repatriate the dough by selling their dollar denominated securities for yen. Their intent wasn't to achieve capital gains, it was to preserve buying power. The strategy failed. Auto-correlated feedback. They rushed out of the yen and got bagged when the hedge traders were forced to liquidate their over extended hedges in an attempt to cover. The "hedgers" were blown out by the fear driven Japanese who didn't know the extent of the hedging. Remarkably fair.
Now the other shoe will fall. That means a mad dash scramble out of the dollar into yen and marks. None of this has anything to do with the realities of real economy. It's just a psychological paper shuffling game. The scale of these actions is the tail. The tail does not wag the dog, but it can frighten weak central bankers in to making wrong policy decisions. That is the only consequence to real economy. It is like a stock which suddenly gets bashed because some large owners dump for some unknown reason. The market instantaneously plunges. Then it bounces back if the action was non-fundamental to earnings expectations. It will stay down if the dumping is due to fundamental change. The paper shuffle causes prices of securities to jump around, but that has no significance. It has no significance because the financial problems of Japan and Asia don't have real economy force.
I have tried endlessly to emphasize that the Japanese debt tower falling only means that banks have to post losses. Big deal. But look what happens when they go out of their way to avoid that. They lose far more and they could create a regime of fear that does impact real economy. The only thing they have to fear is fear itself. The tightly knit economic fabric of Japan is unraveling and has become full of distrust. That's all part of the end of the wealth formation period.
I don't know what you mean by "short" yen. Hedge funds were short yen. How can Japanese be short yen? Short against the box? Who has taken down a yen loan? And why is it inflated? How do you inflate a loan? What does that mean? Hedge funds haven't shorted yen to buy dollars, Japanese banks haven't shorted yen to buy dollars. Hedge funds may be short yen, but they hold an offsetting security to avoid the naked risk. You're long dollar, long yen. That's a hedge. You are short dollar. short yen. That's a hedge. The two currencies are most often inversely related so you are rarely short dollar long yen or vice versa. How can you arbitrage the dollar against the yen? An arbitrage is an adjusting transaction in a near-equivalent security, usually identical security, in a different market in order to benefit from infinitesimal fluctuations caused by information transfer imperfections. The arbitrage action eliminates the misalignment. You can have a hedge in the two currencies to maintain zero risk, and then add or subtract in different markets to take advantage of price differentials. When there is a sudden big change, you can't adjust the risk zero state fast enough, but the divergence doesn't cause big losses. That's why you're hedged.
You say this is deflationary. That hasn't been human history and it sure isn't going on now. The FED is out pumping like there is no tomorrow. Since when is more money available relative to the quantity of goods produced deflationary? Since people will be so fearful that they won't spend? It sounds good on paper, but that's not what goes on. What's going on here is that people want more money to buy things and they don't care what the Japanese are doing. And in Japan a 1 - 5%/yr deflation is no disaster. It's sure is good to the middle and lower classes.
Finally, what does capital draw into itself mean? Liquidity trap? People are so fearful that they'd rather keep their money in banks where it is safe? In a safe big Japanese bank like Sumitomo. In a sock? Well then the central banks are going to have to generate a lot of currency to accommodate the salting away. I wonder if any would get spent. No. Humans are too disciplined to spend money. They save for tomorrow at Tokyo Trust. |
