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Disinflationary Ramifications Of The Declining Japanese Yen

When major currencies move, short-term trading can distort things. On its face, no matter what US Treasuries or German bunds are doing as Japanese and others may be selling them, the massive and ongoing decline in the value of the yen is a potent disinflationary force. Japan has seen a massive increase in the price of oil, copper and even the cost of US Treasuries. Thus it is a less effective competitor for these assets. The US is receiving an anti-recessionary, anti-inflationary cut in costs from actions relating to the yen. This is reminiscent of the 1997-8 "Asian contagion", which was associated by summer/fall 1998 with multi-year lows in T-bond yields.

It looks as though the fear of QEternity ending plus perhaps some Japanese selling of US Treasuries is normalizing interest rates very recently. But the actual fundos of US inflation are benefitted by the recognition that Japan's economy is now very weak and thus its currency needed to be revalued down to reflect that weakness.

Thus this strikes me as good for Treasuries but neutral for US stocks, as Japan can now afford to import fewer US goods and becomes a stronger exporter to the US, thus displacing more domestic US production.

Disclosure: I am long DXJ, TLT, EDV.