Helicopter Ben and his QE II having an effect on Japan and the yen

Here is something interesting.  The Chinese have reversed policy on diversification into the yen. It was my assumption that the Japanese government’s objections would be acknowledged by the Chinese and that they were not the most recent source of yen strength — at least as of three weeks ago.  When I saw that the Japanese intervention had no follow through, I feared the Chinese had continued to buy yen.  This article below suggests something to the contrary.

China sold a record amount of Japanese debt in August, snapping a seventh-straight month of purchases.

China cut Japanese debt holdings by a net 2.02 trillion yen ($24.5 billion), the Ministry of Finance said today in Tokyo, the biggest monthly sale in data going back to 2005. The larger nation bought a record 735.2 billion yen of Japanese debt in May and 1.04 trillion yen of the securities the following two months.

“Today’s ministry report suggests China had purchased yen- denominated assets not to diversify their foreign reserves but to temporarily escape from the unstable financial situation in Europe,” Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo, wrote in a report today.

So then who is buying yen?  My guess now is specs big time.  The new simple story governing markets is ‘Helicopter Ben and his QE II.’  It is amazing to me how all the hedge funds and prop desks who were so wildly bearish on Europe a few months ago are now acting like they never were concerned about Europe and all that matters is Fed QE — which isn’t here yet, and which might not have any impact as a recent Richard Alford article suggested.  It is sheer casino herding.  And that suggests to me that it is occurring through blind selling of the dollar against the yen, and macho attempts to herd the rest of the crowd into the famous 1995 79.75 price point which is totally meaningless from a fundamental point of view.

My experience is that when the bubble era market gets like this it gets to its price point but only with unsustainable over-positioning, and that it carries the simple story too far and something comes along to blow up the simple story, though that often takes a long time.

I now think that the Japanese government isn’t stepping up to offset this spec bandwagon because it will have to do make two major policy departures.  First, it will have to steamroll over the Bank of Japan to the point where it destroys the latter’s independence.  Second it will have to tell all the other countries who are disapproving of its intervention to take a hike because the yen is super strong and their currencies are not.  Post-war Japanese politicians have been too timid to do either as they still live down their bloody militaristic past. But I think that Japan is at the breaking point in this regard.  In any case, I think now is the time to be looking at a bunch of cheap Japanese stocks that could weather something of a recession fairly well and which will soar in profitability if and when the yen turns (as I think it must).

  1. Susijumala says

    Author wrote: “It is amazing to me how all the hedge funds and prop desks who were so wildly bearish on Europe a few months ago are now acting like they never were concerned about Europe and all that matters is Fed QE — which isn’t here yet”

    I fell on the same trap. I’d say it was the pace euro was diving during the late spring 2010 and not the facts beyond it. I managed to cover almost it all, but now…. thinking it afterwards it makes all sense. ECB let on purpose rumours circling around Greece and was just smiling for the fall of euro while cameras weren’t recording it.

    Same fits now when QE2 is “on the table, but no one can not see it there.”

    1. Marshall Auerback says

      I think it was a problem until the ECB stepped in and did what it should
      have done months ago, namely, backstop the national bonds. Until that time,
      there genuinely was a solvency problem which couldn’t be solved via one
      nation state bailing out another (just as 49 other American states can’t bail
      out California). Now, however, the ECB is backstopping the bonds and as
      they are the issuer of the euro, they can set the term structure of rates
      wherever they like. With central banks, it’s all about price, not quantity.
      The ECB is now dictating terms and conditions to both the banking system and
      the national govts. with regard to fiscal policy.
      As my friend, Warren Mosler, has pointed out repeatedly, the fundamental
      structure of the eurozone includes no credible bank deposit insurance that
      now keeps the bank dependent on direct ECB funding. It also includes
      national govts. that are in the position of being credit sensitive entities, much
      like the US states, only now with debt ratios far too high for their
      market status who are now directly or indirectly dependent on ECB support via
      bond purchases in the open market.
      And there is no way out of this control for the banks or the national
      govts. There will be large deficits one way or another- through proactive
      fiscal expansion or through automatic stabilizers as attempts to reduce deficits
      only work to a point before they again weaken the economy to the point
      where the automatic stabilizers raise the deficits as the market forces ‘work’
      to obtain needed accumulations of net euro financial assets.
      This inescapable dependency has resulted in a not yet fully recognized
      shift of fiscal authority to the ECB, as they dictate terms and conditions
      that go with their support.
      Yes, the ECB may complain about their new status, claim they are working
      to end it, etc. but somehow I suspect that deep down they relish it and
      announcements to the contrary are meant as disguise.
      In the mean time, deficits did get large enough the ‘ugly way ‘in the last
      recession to now be supportive of modest growth. And even the 3% deficit
      target might be enough for muddling through with some support from private
      sector credit expansion which could be helpful for several years if
      conditions are right.
      Also, dreams of net export expansion are likely to be largely frustrated
      as the conditions friendly to exports also drive the euro higher to the
      point where the desired increases don’t materialize. And the euro buying by
      the world’s export powers, though welcomed as helping finance the national
      govts., further supports the euro and dampens net exports.

      In a message dated 10/8/2010 22:35:47 Mountain Daylight Time,

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