Bank of Japan

#JustDarioDaily

⚠️ GET READY FOR THE LAST BANK OF JAPAN “FREAK SHOW” OF 2023 ⚠️

Almost 2 months ago, I wrote a post where I tried to expose the #BOJ incredible incompetence (post in the quote). At that time, I used the analogy below:

“Now that the #BOJ enjoys the luxury of having its cake and eating it too no more, the time to take the tough decision to ‘cut an arm to save the body’ is very close. Why this analogy? Because Japan caught an #inflation disease their immune system failed to contain and is now risking to spread throughout the whole body, threatening its death.”

In a few hours, we will know the outcome of the last #BOJ policy meeting of the year and all I expect is another great bluff. 🙄 Why? The BOJ is in a Lose-Lose situation with no easy way out anymore. Whatever they decide is going to have bad repercussions somewhere so best they can do is delaying the inevitable praying for a miracle at some point in the future. 🤷🏻‍♂️

What happens if tomorrow they decide to end the era of negative rates?

Short-term: the market’s knee-jerk reaction will significantly strengthen the $JPY disproportionately, even if short-term rates become a few basis points positive. Why? This will be, for the most part, a consequence of a wave of $JPY carry trades unwinding that, due to the magnitude of the leverage built (more details here x.com/dariocpx/statu…), will suddenly become more expensive (if not unprofitable) to keep in place, due to the $JGB curve yield repricing much higher funding costs. 

Furthermore, this will trigger a tsunami of margin calls across the world, with consequences that are hard to imagine.🙈

Long-term: as I have said many times, raising rates without ending QE will be absolutely inconsequential in changing the (kamikaze) course the BOJ set its currency and country on. 

Counterintuitively, it will increase #Japan interest expenses, requiring even more $JPY money printing to pay them (because there are zero chances the government embraces draconian fiscal spending, debt-reducing reforms), increasing the devaluation pressure on the currency and the overall #inflation as a consequence. 🥲

What happens if the #BOJ decides to do nothing tomorrow and just bluff their way to the next policy meeting in 2024?

Surely the hedge fund “Hyenas” (x.com/dariocpx/statu…) will try to “counterattack” after they have been badly hurt by the BOJ rescue operation orchestrated by Janet “Tinker Bell” Yellen and executed by the #FED (x.com/dariocpx/statu…) that massively squeezed all the $JPY shorts out there. If they succeed I expect a quick devaluation of the $JPY towards 152 vs $USD.

In the longer term, Mr. Market will resume putting pressure on $JGB yields, in particular, the 10-year and above tenors, as a natural consequence of pushing for positive real yields (nominal yields minus inflation). Needless to say, the BOJ will not hesitate to step up the QE to defend the YCC they supposedly scrapped a few months ago in one of the biggest “bluff” failures this year.🤭

To conclude, I expect the BOJ will simply try to bluff themselves out of their troubles tomorrow, leaving a veil of confusion on their monetary policy. 🥲

They will likely hint at “policy normalisation” to scare away the hyenas while at the same time “winking” (saying that “will take long”) at all that part of the market addicted to the endless stream of $JPY liquidity they drunk in the last decades and at the Japan government that already made its plan to go ahead in 2024 with the most inflationary stimulus plan and unfunded tax cuts ever conceived by a human brain.

As you might have realized by now, you can expect 2 things for sure no matter what:

1 – #Japan inflation will continue going up as a consequence of the reckless policies supported by the BOJ and Japan government.

2 – $JGB yields will continue to increase in the long term, with a long list of consequences that sooner or later will break something somewhere in the global financial system.👀