Halloween is supposed to celebrate ghosts and poke fun of the dreary monsters. It is also a time when kids and adults get fancy with their outfits. The culture is far from common of the role central banks play when dealing with serious crisis. But this year, The Bank of Japan did manage to pull a trick up its sleeve when Koruda, Japanese Finance minister spooked the markets by announcing a new round of Quantitative Easing. Japan normally has been in the shadow of largely monetizing debt and it's been almost two decades that the country has been living and breathing zero interest rate policy. No wonder, a weaker yen would promote exports and promulgate economic progress It was also well anticipated and expected that Abe, the premier was resilient on debt reduction, when he increased the income tax. Japan was on a mission to get the economy back on track. Under the new wave of monetary base expansion, Koruda as expressed an indefatigable tirade and throw the weight of whatever it takes to get the country out of recession. A trillion Yen is by no means less money and if that would not be all, the largest pension fund in the world albeit the Japanese fund plans of increasing its equity share to almost 50%. It would be hard to comprehend the spillover effect of such a Tsunami.
As an investor, I love shorting the yen. Infact there is even an ETF, YCS a double short highly leveraged Japanese Yen to the US dollar. While YCS packs a knock out punch, it needs to be respected. A single basis point move in the USDJPY markets corresponds to two basis point move in the ETF world. Great risk entails great reward but also greater loss. So, what does it mean, for the markets. For now all is gung ho in the world. The news has been a welcome for long dollar speculators and what's not to like about the carry trade. It wouldn't take a genius and a visionary to see how he could leverage up and make some short term gains.
Really, but is that all so easy to make money! Can it factually be incorrect to second guess, that when all is good and welcoming , few are casting black shadows on the trade and speculating a bubble. After all, who really cares for the black swans. They are better deserved and heard when the bubble bursts. I would again like to remind investors that tread with caution. The road to financial freedom are liberally laid with mines that could blow for any carless mistakes. It is a well known truth, that monetizing debt has never worked. Japan has been a victim of it, and paying heavily for it against the last two decades. But in such a liberal economy, you cannot, would not and should not view any of these actions in isolation. Abe intends to spark inflation, that would get the ball rolling, he desires volatility and that would prime the equity engine. But with zero interest rates, comes a greater probability of carry trade. Borrow money for zero down and invest in economies bracing financial success such as the US. This would mean, more money inflow to the country, which would fear to destabilize the equilibrium. It would effectively translate to a confused state where the Fed is vying to spike the interest rates and curb the money flow, but outside money from other sources freely flowing in. To counter the effect, Fed would have to go from almost zero to 200 basis point hike in short time. This action could spook the interest rate volatility and also equity world. Bond holders and cash hoarders would be screaming bloody murder. If the Fed delays the rise, then again it's a problem. Banks are already dead piled with liquidity and too easy of a credit situation would encourage higher inflation. I don't mean, inflation is bad, but too much can be bad. And then again, we haven't even considered what if the experiment goes all wrong and Japan slips into deflation. Well, then we got a bigger problem at hand, the combined effect of global slow down. All would be lost because the monetary inertia is too hard to ignore.
Such is the diplomacy of finance engineering we all live by, uncertainty and speculation is the name of the game. Trick and treat is for kids, but candies are the real currency.