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Samurai is Not Well

A few months ago hardly anyone who was tracking currency and the economy of Japan closely would have seen this coming. Today Japanese Yen touched a level of 135 against US dollars last seen in 1998.

Some products have seen a price rise in the country after four decades. The inflation, that every government of the country wanted to come up to positive territory is now almost breaching one percent.

These are indications or perhaps symptoms of excessive liquidity at no cost. The theory that an old-age dominant country can print money and support its economy without any consequences is proving not only wrong but also impossible to correct like an addiction.

As of November 2021, the Bank of Japan owned sixty percent of assets in ETFs listed on the local exchange and forty-four percent of local government bonds. In addition to this, it is the top holder of USA government bonds and was the majority buyer in recent times.

Now as the currency and economy face large hurdles its impact would not be limited to the local economy and financial system but also lead to ripples at global levels. Because of the addiction, BoJ is being forced to buy local bonds at an unlimited amount to keep yields cooled off as it does not intend to increase rates that would impact its pension liabilities and other funds.

Selling the largest asset on its balance sheet is funding this buying. Yes, the USA bonds it owns and when the largest buyer becomes the largest seller then the yields will rise above what everyone expects.

The biggest issue will be when the Bank of Japan will be forced to increase interest rates and the impact of it on the local financial system and the global is anyone's guess. But the news of this action will not digest easily in the financial world as the biggest printing machine in the world turns off after decades.


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