Wednesday December 21, 2005 - 11:42:30 GMT
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Black Swan Capital - www.blackswantrading.com
Yen and rates?
“This columnist’s premises are the following. First, the world’s second-biggest economy has started—but only started—on the path out of the morass formed by a decade of deflation. As the recovery builds speed, it is likely to be sustained by a virtuous circle of forces.
“The second premise is that the recovery will continue to be accompanied by supply-side reforms amounting to a revolution in the way capital is allocated.
“Third, and crucially, the central bank will continue to provide free money for the foreseeable future.”
Bottonwood column, Sweet Spot, The Economist
It seems a consensus the Bank of Japan will likely raise rates later rather than sooner.
“Japan will say sayonara to deflation in 2006, but the goodbye will be prolonged. The direction of prices is clear, but the measurement, theory, and politics of changing monetary policy will be a labyrinth. Fortunately, the delays in saying goodbye to deflation will only give the economy more ability to solidify structural gains. With strong productivity growth continuing, both profits and wages can rise, while prices stay subdued and real growth becomes more self-sustaining, writes Robert Feldman of Morgan Stanley.
Mr. Feldman is targeting spring of 2007 for an end to Zero Interest Rate Policy (ZIRP). Does that mean the sharp move in yen i.e. plunge in $/yen, was simply a very good opportunity to back up the truck?
Buying $-yen—buy Nikkei—hibernate for a year or so!
If the consensus is right about Japanese stocks, the buy Nikkei – buy $/yen trade will likely need adjusting. For at some point, the weight of money flowing into the Nikkei—and by the virtuous circle it will create, will lead to increased foreign direct investment. Thus we have a situation of hot money and longer term capital piling in. This will likely turn the tide for the yen in spite of ZIRP. The recent $-yen plunge could be precursor of things to come.
It’s just a reminder that it’s not always about interest rates.
Black Swan Capital
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