Intervention - Fatal Flaw in Capital Markets?
In the news today is the Japanese Yen, as it approaches critical resistance at the 146 level. The market has steadily been making new highs on the daily level this year, having just exceeded the July high. As seen in the chart above the market has moved quickly through levels of resistance, now breaking a downtrend line from the major Oct 22' high. See below a quarterly chart, the Yen is making new highs at significant timescales, possibly threatening a breakout as the historical ceiling is much higher than the modern perception might lead one to believe.
The need for intervention around the current price level has become a concern for the global investment community, since in September and October the Bank of Japan proceeded with heavy selling of US Dollars to support their currency at the 145 level. This was last reached in 1998, at the height of the infamous Nikkei bubble as equity market growth produced historic inflation. However there was no need, or thought for intervention then which begs the question of why it is seen as a necessity now.
This is largely due to the degradation of credit markets around the globe, and the inability of central banks to produce productive inflation, meaning real economic growth. In 1998 the yield for a 10 year bond was around 2%, whereas outside the US negative interest rates have become common. See below as the yield for 10-year Japanese Government bonds has pushed against, and exceeded the imposed 'ceiling' since moving from negative interest rates.
The attempts by central banks to "stimulate" investment by lowering bond yields has in fact had the opposite effect, since investors will naturally seek the highest return on investment .
In the modern economyc, bonds and government credit are treated as cash, so as central banks buy sovereign debt they are absorbing and concentrating capital which historically has circulated globally across currency and asset classes. This has the effect of domestically creating deflation, as capital is less free to circulate, but internationally will create inflation as (in this case) investors are not buying Yen-denominated debt , leading to the Yen losing strength in FX-markets.
So the level at which intervention is required to support currencies is slowly being drawn lower, as the Bank of Japan burns the candle at both ends. It is NOT possible in globalised, open markets to engage in both bond market and FX market intervention as one or the other must reflect the degradation of economic conditions. This issue cannot be resolved domestically as international capital dictates growth, and lowering yields is not a means to attract investment.
The Bank of Japan has resolved to loosen control on bond markets, by allowing 10- year yields to settle on a market-determined fair price. However, price discovery has not been a relevant dynamic in credit markets for nearly 30 years. With FX already at critical levels, it is important to be wary of volatility as capital flows shift with respect to war, credit and equity bubbles around the world and so on. Europe and China, among others should also be under the radar for engaging in this flawed logic without international support for their currency. So long as the United States, backed by foreign reserves of US dollars, pushes the bill on interest rates this intense pressure will continue to be reflected in global financial markets.
The need for intervention around the current price level has become a concern for the global investment community, since in September and October the Bank of Japan proceeded with heavy selling of US Dollars to support their currency at the 145 level. This was last reached in 1998, at the height of the infamous Nikkei bubble as equity market growth produced historic inflation. However there was no need, or thought for intervention then which begs the question of why it is seen as a necessity now.
This is largely due to the degradation of credit markets around the globe, and the inability of central banks to produce productive inflation, meaning real economic growth. In 1998 the yield for a 10 year bond was around 2%, whereas outside the US negative interest rates have become common. See below as the yield for 10-year Japanese Government bonds has pushed against, and exceeded the imposed 'ceiling' since moving from negative interest rates.
The attempts by central banks to "stimulate" investment by lowering bond yields has in fact had the opposite effect, since investors will naturally seek the highest return on investment .
In the modern economyc, bonds and government credit are treated as cash, so as central banks buy sovereign debt they are absorbing and concentrating capital which historically has circulated globally across currency and asset classes. This has the effect of domestically creating deflation, as capital is less free to circulate, but internationally will create inflation as (in this case) investors are not buying Yen-denominated debt , leading to the Yen losing strength in FX-markets.
So the level at which intervention is required to support currencies is slowly being drawn lower, as the Bank of Japan burns the candle at both ends. It is NOT possible in globalised, open markets to engage in both bond market and FX market intervention as one or the other must reflect the degradation of economic conditions. This issue cannot be resolved domestically as international capital dictates growth, and lowering yields is not a means to attract investment.
The Bank of Japan has resolved to loosen control on bond markets, by allowing 10- year yields to settle on a market-determined fair price. However, price discovery has not been a relevant dynamic in credit markets for nearly 30 years. With FX already at critical levels, it is important to be wary of volatility as capital flows shift with respect to war, credit and equity bubbles around the world and so on. Europe and China, among others should also be under the radar for engaging in this flawed logic without international support for their currency. So long as the United States, backed by foreign reserves of US dollars, pushes the bill on interest rates this intense pressure will continue to be reflected in global financial markets.