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Is the Bank of Japan In Play?


The BOJ is likely to shift...

The 2-year forward Euroyen Deposit Rate strip has moved from below +50 basis points, to nearly +100 basis points, reflecting the market's belief that the Bank of Japan will act to raise short-term interest rates from zero and will raise them by at least +75 bp over the next two years.

It will be critical to see what happens when (if) the BOJ moves on short-rates, in terms of the long-end, as defined by the 10-Year Japanese Government Bond, which is already threatening to breakdown and violate a fifteen year trend towards perpetually lower yields.

We cannot help but think that a move by the Central Bank representing the world's largest creditor nation, a Central Bank that has offered funds at a cost of virtually nothing for years, will have a significantly larger impact on global capital markets than has the move by the Fed, representative of the world's largest debtor nation, to raise the cost of USD based funds.

This is especially true in light of the fact that while the Fed has raised the cost of money, it has not done so to the point of inhibiting demand, nor supply, of USD liquidity, which remains excessive globally.

Subsequently, going forward we are monitoring several markets, for clues as to what the reaction might be, to a tectonic monetary shift by the BOJ.

We are watching the value of the Yen, particularly as relates to the Aussie and New Zealand Dollars, both of which have reflated in line with the monetary reflation seen in gold and commodities.

We specifically note the Kiwi Dollar; amid softening macro-eco data released this week and the breakdown in the NZD versus the U.S. Dollar. Observing the chart of the Kiwi Dollar versus the Japanese Yen, we can identify the 77.45 yen per Kiwi level as a key technical pivot point, below which the reflation trend in place since 2001 would end.

And finally, the energy-heavy Goldman Sachs Commodity Index, or GSCI, seen in the weekly chart, amid a serious threat to the sustainability of the long-term macro-reflation defining uptrend, as defined by the attack on the Moving Average and 2005 low.

Further, we note the decline into negative territory by the 6-month Rate-of-Change, indicating a diminished reflationary push emanating from the petro-patch.

Bottom Line: The BOJ is likely to shift (despite the fact that the GDP Price Deflator remains decidedly negative) and, more importantly, we believe that such a shift will have more serious implications for global financial markets than is currently being contemplated, particularly as applies to global long-bond yields, and commodities.
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