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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: Hawkmoon who wrote (2511)	8/15/2000 5:54:23 PM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 3536

The Japanese are in a bad box. As you imply, the Japanese tax burden needs to increase in order to pay off the debt. The problem is that in the current environment they have very little ability to raise taxes. The last couple of years they have been deficit financing at a double digit rates and for their troubles have gotten the kind of growth that would get a US politician run out of office. If they raise taxes to close that there is a real chance the economy will roll over again. So they have to but can't. Bad trap. Your comment about JGB rates brings up an interesting point. Interest expense has been a minor component of their deficit due to the very low rates. If rates back up to the point where they have to start paying more normal rates on their massive debt it will really baloon the deficit. Theoretically higher yen interest rates should strengthen the yen (btw I've never been a big believer in that theory). However the question will be why are rates going up. If, as I believe, the real rise in yen rates begins when it becomes clear that the gov't is debasing the currency as a way to get rid of the debt then it is unlikely the yen will strengthen. As to whether this is a good time to short the yen, as I said there are always head winds. Some of the best trades I have made in recent years is by counter punching against common sense in Japan. I feel much more comfortable being short yen over a long term horizon. In the near term the strong deflationary pressures that are still holding sway in Japan will suck money home which will generate the head wind I referenced. Timing is critical. Thats why I said look at the resistance we are approaching. Either wait for a correction from that level or jump on a confirmed break out.