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Unwinding Yen-Carry Trade

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  • Unwinding Yen-Carry Trade

    I follow Brad Setser's blog a lot at

    He's really analyzed world captial flows, and he follows along with the theory that central banks are responsible for a lot of this mess.

    The bloomberg post above is very intersting, because it hints (at least to me) that unwinding the carry trades may suck out a lot of excess capital from a lot of markets.

    What does this mean? Asset deflation, price deflation, global equity crash.

    USPIX (derivatives and such might be good investments right now, but beware, when predicting recessions you lose the house advantage.

  • #2

    I posted this question to you somewhere else on the forum, but apparently you have not seen it.

    You wrote you had 90% cash.

    My question: Of what exactly are you most fearful in the markets?

    Jim 69 y/o

    "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

    Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

    Good judgement comes from experience; experience comes from bad judgement. Unknown.


    • #3
      - Massive structural imbalances
      - potential hard landing in the RE market, meaning less wealth effect and no more Home Equity Loans, ie: cut down in consumerism
      - globalisation generally keeping prices and income growth down
      - Japan potentially leaving ZIRP
      - Potential Oil shocks

      Also, recently big jump in the VIX

      This is a measure of options premiums, which indicates that there is a huge potential volatility hitting the market.


      • #4
        Can someone clafiry my understanding, please?

        The BOJ haven't raised interest rates yet. What they are reported to have done is started to make it harder to borrow yen.

        They haven't changed the reserve reqts at the banks, so they are actually sucking cash out of the system, right?

        What are they using to buy the cash back with?

        Dollars or JGBs?

        In 2003/4 the BOJ/MOF in concert created all those helicopter Yen by printing them to soak up all the dollars flowing into the country, then buying US Treasuries with the proceeds (stabilised the Yen/$ rate,kept US bond yields low . and pumped up M3 - the vicious cycle written about by Andrew Duncan).

        Are they unwinding this or are they now going to pump out JGBs rather than US Treasuries?


        • #5
          Well, I think it isn't so much pulling out cash but rather pumping it in at a slower rate.

          For example, the fed in the US doesn't actually ever sell bonds, they just buy it at different rates (buy slower and the rate goes up, buy faster and the rate goes down).

          The reason being is that both Japan and the US are pumping bonds into the system at a fantastic rate by all their borrowing, so there is a natural pressure for bond prices to go down.

          It's really insane when you stop to think about it, that basically the US government is borrowing from itself, but it works, people still buy bonds, so I guess it makes sense to someone.


          • #6
            Nope. It looks like money is actually shrinking


            and at a shocking rate.

            So what's the mechanism?


            • #7
              hmmm, according to that graph japan only has a monetary base of 10 billion USD.