OK Predator, there is an opportunity to make some real money!
The USD/JPY exchange rate has moved beyond 151.00. The Bank of Japan (BOJ) is actively intervening in the market to prop up the currency, while also acting to defend the long standing yield curve control policy that holds Japanese Government Bonds (JGBs) near 0%. The BOJ policy is unsustainable in the current market environment. Something will break. My expectation is that it will be yield curve control. In other words, JGB yields are about to EXPLODE higher. Put options anywhere on the JGB curve should benefit, with 2s to 10s most favored.
The Details Matter!
Timing is hard to predict. The BOJ has hundreds of billions of dollars worth of US Treasury securities it can sell in order to defend the currency. Exchange rates will be volatile. The problem is that resource poor Japan is importing inflation - north of 20% YoY - that its people cannot support. They are basically eating all the inflation the rest of the world is exporting via the exchange rate. And things are set to get worse. Terminal rates for Fed Funds are now expected at or above 5% in March of 2023. The BOJ has its Fed Funds rate equivalent at -0.10%; a negative interest rate.
The BOJ implemented yield curve control because it has a terrifyingly large pile of outstanding debt. It is around 300% of GDP. The US, by comparison, has a debt to GDP of around 100% and it is finding it hard to locate enough buyers to support the outstanding debt. Japan hasn’t had a functional debt market for over a decade now. There are no buyers. The BOJ buys all of it. 100% monetization.
If Japan had to go to international investors to raise cash – which it will have to do at some point on its current path – the people will need to pay taxes at unsustainable rates just to cover the interest. It would be government collapse. No other way to put it.
That said, we’re all just dumb primates floating through space on a rock. The global political machine will step in to shore up the system at some point. Trends in the macro picture could change or turn out not to be what is reported. And ultimately, the market could just continue to let the BOJ slide on its ever expanding offer of free money. So in the end it is a bet on an outcome.
But the free money is getting very large in a world with rapidly vanishing liquidity.
My bet is that this system breaks before the political will can be found to solve the problem.
If you agree and you make some money on the trade, send a portion to the litecoin address below. Proceeds go to get the kid a home.