S&P 500 & Nasdaq Analysis and Trends

[AnderL]

The problem is that they do not want to appreciate the Yen in order to reduce carry traders postions because it will cause a global imbalance. Japanese and US central banks want to maintain a stable trade balance. But domestically they do not want to cause inflation.

The Fed on the US side is curbing inflation by raising rates but they are making a lucrative environment for a carry trade between the US and Japan. Not as great as New Zealand, Iceland, Swiss Franc but good never the less. Increasing rates would only increase the carry trade between Japan and the US. Pausing only proves to the traders that the trade is lower in risk as no changes in policy means that can add on to the trade leveraging more making it all worse. A cut in rates squeezes the traders but too much and causes inflaiton in the US to increase and that results in higher rates in the future eventually. That stifles US growth.

So we get a lot of mixed signals in the US and Japan about inflation potential for higher rates, markets expecting a pause, BOJ saying they need to raise rates and turning around and saying they will do so as they see fit. I expect that they will do as they do and not as they say.

Borrowing yen to buy dollars provides a lot of liquidity to buy dollar based assets and that demand for the dollar provided the Treasury to print so much recently with little appreciation in the US Dollar. Inflation is not much of a problem here but it is starting to become a problem in Japan and they need to increase rates.