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Strategies & Market Trends : JAPAN-Nikkei-Time to go back up? -- Ignore unavailable to you. Want to Upgrade?

To: borb who wrote (898)	4/14/1998 1:45:00 AM
From: ahhaha	Read Replies (1) \| Respond to of 3902

I don't think many are understanding the significance of the recent BOJ move. I will explain it. The BOJ has drawn the line. They have said, "uncle"! We can't take any more deflation. They are creating fiat yen by shorting the dollar. They've shown their hand. They've committed themselves. This is a major error. Sometimes a central bank just has to stand around and wring its hands looking inept but doing nothing. The BOJ failed to persist in this strategy and will learn again that overt intervention is the wrong policy. They are trying to solve a fiscal problem with monetary policy. We know better than to do that, don't we? The open market now knows that if the dollar firms, the BOJ has to go in and short some more. Reminds me of divulging a large short position to the market (see Resorts International). They'll run it against the BOJ to test their mettle. There is the problem that the BOJ doesn't have infinite fiat powers and there is the problem that propping the yen means the FED ends up having to dump Bills on a saturated T market. It doesn't matter who is selling, the result is a back-up of short rates in the US, but also the result of too much fiating by the BOJ would bring about monetary inflation in Japan. The Japanese would have a wild drunken party over the bailing out of their bad debt with the inflation solution, but the next day hangover could send their economy into hyper-inflation and total bust. The FED knows trouble is coming in the US through strikes for higher wages, but they expect to let the market tighten later in the year as inflationary pressures brew. They don't want to encourage it now. If only because it would cause a tidal wave of selling in the American stock market. They haven't had a chance to properly prepare the way so the psychology can take the bearish blast. So the FED will have to counteract the Bill supply by RP purchases and coupon passes. They may even have to instruct the Treasury to sell dollars to join forces with the BOJ. The G7 will be informed of these contingencies on Wednesday. In any event a rising dollar forces the BOJ to act and the results are upside explosive for Japanese stocks. The BOJ is exporting their deflation and if the US doesn't want to accept it, the result will be inflationary on the US economy. If the US, already has a developing inflationary problem, refusal to accept the mitigating effects of the induced marginally rising interest rates will cause the US to develop a major structural inflation problem with the inevitable major run-up of interest rates. Thus, the FED should not make any compensatory moves to keep the Federal Funds rate from rising. If they do, gold will really start rising. It is important to separate monetary effects from fiscal effects. The BOJ move's effect is domestic monetary, it only encourages price increases noncommensurate with productivity increases. It is the shot heard round the world that will end the Virtuous Cycle of good fiscal policy and disciplined monetary policy and bring back the Vicious Cycle of the good ole days of '70's. Martha, brush off the gold and get out the puts.