Domo Arigato

In Hedge Funds and Central Banks we touched on why Japan buys bonds which represent worthless dollars.

...there is an existing carry-trade between the Japanese and American bond markets. Over valued Japanese bonds are sold and the proceeds are put in undervalued American bonds. This carry trade has actually been helped by the devaluation of the dollar. The Japanese exchanges are far in excess of the need to finance the American trade deficit with Japan. The only purpose of this exchange would be to prevent a run on the dollar by other central banks and foreign exchange speculators.

We had borrowed with a strong currency and were paying back the debt with a weak currency. Not a good deal for our Japanese friends. But when they have to, they grin and bear it. A good solider accepts his orders and carry's them out, no pun intended.


To worsen matters, volatile currency fluctuations caused by other foreign banks and hedge fund speculation effected the spread on our bond arbitrage with Japan. The Fed raising rates has increased profitability of the $/yen bond arbitrage. The subsequent drop in the Yen; and Dollar rally has stabilized the pricing and extended the life of this arbitrage, which has been keeping things afloat for quite sometime, again no pun intended.

The global economy will hit a 2nd Qtr softpatch, after bottoming, stocks will rise and fall again, oil and commodities will pull back, and bondholders will be squeezed. As interest rates rise the real estate market will have its turn in the barrel. We will eat some Japanese style deflation.

Its only fair, it takes two to tango, we import their zero interest rate deflation, they support the US dollar. We tap their savings, their treasury and banks profit through the arbitrage. They weaken the yen, which provides their economy with jobs. Is this sounding vaguely familiar yet?? We're just breaking the Chinese in at this point.

This has kept our interest rates artificially low, allowing us to borrow the large amounts of money needed to service our debt. The low rates have allowed us to conduct large amounts of finance based economic activity, one of them called mortgage lending. In the near future, as rates rise and the dollar with it, the carry trade equilibrium will be maintained between our dollar, the yen and the yuan. Dont' worry China is in on the deal too.

The Euro"peons" did not want to go on the holy crusade for oil, so we hit them with a currency play. It was a triple play, devalue the dollar, the yuan and then the yen. It was our way of giving the Bundesreich the middle index finger while gently squeezing their wobbly bits in a vice. Their starting to breathe a little now, after begging for mercy and turning quite blue.

Japan is an energy starved island that we beat senseless in WW2. They need us for our military protection and to provide them access to energy sources in the Middle East.
North Korea has nukes, Taiwan and China are at odds and we have recently realigned our military forces worldwide.

Depending on what the future presents in the Asian theater, and how Bejing conducts itself, there could be a change in the Japanese Constitution. One which would allow Japan a military presence in the region and us to supply them with arms.

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