The Yen Carry Trade: Ready to Repatriate?

Since we have such a hushed market Monday with the Fed meeting Wednesday, I wanted to look hard at the interest rate situation in the U.S. and abroad. The BoJ put out their minutes to their meeting overnight. Did anyone notice? Didn't think so. I'll paraphrase the important information for you:

Interest rates are going up.... probably.

BoJ governor Fukui has made it clear that with continued growth and inflation, interest rates should be normalized. Perfect. Except... didn't the inflation numbers pretty much fall flat on their face just two weeks ago? I believe they did. But, at the same time, we've seen some decent numbers with Japanese GDP. That puts the Bank in kind of a sticky situation.

I'm kind of leaning towards most central banks being at about the levels of interest rate increases that they need to be. I could see the ECB and Bank of England doing maybe perhaps one more. But I think that's it. The market suggests that it is thinking the same thing. Puts over calls are pushing for the downside in these and other currencies. I believe the topside to the higher yielders is in place for now.

I've always believed that if the BoJ were to bring interest rates back up to normal, growth would continue at its pace as well as a sharp increase in inflation, what with something like $1 trillion in the carry potential repatriating. That should solve a lot of the world's liquidity problems as well. That would mean further interest rates would not necessarily be needed from the Bank of England, Reserve Bank of Australia, Reserve Bank of New Zealand, Bank of Canada, European Central Bank and of course our own Federal Reserve. All that money in our system slowly moving back to Japan would do the dirty work for the world's central bankers.

So, if we have most central bankers sitting about where they are going to be for some time, and we have a "normalization" period approaching in Japan, I'm having a tough time arguing that the trend will persist in the carry currencies. I think we'll start to see some profits come off of the table as the differential begins to narrow.