The Bank of Japan is as screwed up as Jay Powell’s Federal Reserve.
There, I said it. Except they bow more, are more polite, and don’t lie on mortgage applications (yet).
Today’s GDP and durable goods report along with the apparent embrace of a stagflationary growth policy by the Federal Reserve has created even greater validation that the United States is willing to play fast and loose in the currency wars and that is going to impact Japan far more than the BoJ anticipated.
While America slumbered, the minutes from the July Bank of Japan (BoJ) meeting revealed the following (via Reuters):
Some BOJ policymakers called for future rate hikes, July minutes show
Excerpt:
At a subsequent meeting in September, two board members dissented from the BOJ’s decision to keep interest rates steady at 0.5%, instead calling unsuccessfully for a hike to 0.75%.
The July discussion reinforces the dominant market view that the BOJ will raise interest rates again this year as a U.S.-Japan trade agreement has reduced uncertainty over the economic outlook.
“The BOJ’s policy rate is lower than the level deemed neutral, with prices remaining relatively high and the output gap being around zero recently,” one member was quoted as saying in the minutes of the July meeting. “In such a situation, it’s appropriate for the BOJ to return the policy rate to its neutral level where possible,” the member added.
The reality? They are far behind the curve as the US is going to export its stagflationary policies to as many trading partners as it can to maintain the ‘K’ shaped economy while at the same time fight against the deflationary impulse being created by the flood of cheap exports from China.
In the end, since the US is Japan’s Treasury partner, for lack of a better term, they will be force fed our paper and probably US equities before it is all said and done. What does this mean for the US Dollar Japanese Yen relationship? Probably the mother of all bases being formed (MOAB) in this currency relationship:
Since the very popular carry trade appeared to unwind with the recent strength in the Yen there has been a palpable panic in equity and credit markets alike. However, any rate increases issued by the BoJ from this point forward should be viewed just like FOMC statements; all fluff, no meat, just for show.
The trend is your friend and odds are by 2026 markets will see a 170+ USD/JPY relationship if not much, much higher.
