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The Yen War Begins

On Friday, the long-awaited step was taken by the Bank of Japan After almost three decades the central bank intervened in the currency market to control the value it was reducing against the dollar. Though the amount would be known at end of the September data release post-intervention press conference made it clear that it is a number that cannot be hidden.

As mentioned in some of the previous blogs, the real world is shifting in a very different direction than shown by the equity markets. If anyone needs to understand the shifts then they need to focus on currency and bond markets.

So when the Japanese bond market is looked at then it does look very stable but there are two factors at play. One is that the yield has remained stable as the Bank of Japan has made sure that it will buy an unlimited amount of bonds at a fixed yield. Second is that for the past few days it is only buyer and seller in the market as the rest of the major participants do believe that yields are due to change.

The case of Japanese Yen is one of the most important currencies as it holds approximately 12% weight in the dollar index. And being a net exporter country any inflation due to currency is passed on to importing countries quickly. And in the past month of so, it has depreciated by 7.5%.

Though the Bank of Japan has kept its policy and interventions in the market steady. But in the medium term, there is a high risk of it being defeated. The negative rate policy with high money printing that is due to accelerate in November has already pushed inflation to an 8-year high when the population is aged.


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