The YEN to go home, despite Big Al's wishes.

greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Connect the dots. Ask yourself if the Japanese really want to control the Yen's rise. After all, they have a savings rate that's three times the rates in the US. Ipso facto they will have "panic withdrawal rate" of three times that of the US. This is what that whole JGB fiasco was about.

The Japanese aren't stupid. They know that they must take yen home. All the currency traders thought that 110 was Key resistance. We're going to blow through that one in all liklihood, because although the Japanese BOJ officials say that lower levels would "worry" them, they know that the mission is clear--- TAKE YEN HOME AT ANY COST. Please note that the Japanese senior bank official is meeting in Jackson Hole with Al and the gang for the weekend. I assure you that some heavy talks are taking place. Our deficit is going to the moon. No, they will most likely lie to Big Al this weekend, but they will continue to bring the Yen home at any cost. Big Al and company are quite nervous as they are trying to keep things glued together at home themselves. Unfortunately, they are late to the game and behind by several points going into the fourth quarter.

For educational, research and financial survival reasons only: Friday August 27, 5:23 am Eastern Time Japan banks' Y2K efforts proceeding smoothly--BOJ TOKYO, Aug 27 (Reuters) - Japanese banks' efforts to cope with the millennium computer bug are proceeding smoothly, the Bank of Japan (BOJ) said in a survey released on Friday.

Eiji Mutoh, director of the BOJ's Bank Supervision Department, said the BOJ stands ready to provide liquidity as needed to the banking sector to prevent any disruption of the financial markets by the millennium bug.

The BOJ is thinking of various ways to provide liquidity but has not yet come up with any concrete plans, Mutoh said.

The BOJ survey on financial institutions' preparations to cope with potential millennium bug-related problems was conducted in late June, with responses from all 674 institutions surveyed.

``Financial institutions' preparations are generally proceeding smoothly and the survey confirmed there were no major problems,'' the BOJ said.

The survey showed that cumulative spending by Japanese banks and their affiliates for Y2K preparations totalled 455.2 billion yen at the end of June, up 26 percent from a year earlier.

Six simulation tests conducted between last December and this July to check computer systems connected to the BOJ network revealed no problems directly related to the millennium bug, the BOJ said. The simulations tested computer functions with dates set at January 4 or February 29, 2000.

The millennium or Y2K bug is a hazard for many computer systems that record dates using only the last two digits of the year. If left uncorrected, systems may mistake the year 2000 for 1900, causing them to produce incorrect data or crash.

The BOJ plans further tests on September 19 to check whether the central bank's systems can be switched over properly to a backup computer centre in Osaka with dates set after January 1, 2000.

Another test is scheduled for January 2, 2000, to check the BOJ network's connections to external computer systems.

Friday August 27, 3:00 pm Eastern Time Excessive yen rise would worry Japan-BOJ official JACKSON HOLE, Wyo., Aug 27 (Reuters) - A senior Bank of Japan official said on Friday that if the yen were to appreciate too fast, it would be a concern for Japan.

``If the yen appreciates far faster than the improvement in real economic activity and other asset markets, we would obviously be worried, but that remains to be seen,'' said Yutaka Yamaguchi, deputy governor of the Bank of Japan. He was speaking at a symposium of top central bankers here.

He added the exchange-rate over the next few months remains to be seen.

The yen earlier this week hit a seven-month high of 110.36 to the dollar.

Thursday August 26, 8:24 am Eastern Time

Dollar/yen fall could risk post-World War II lows By Lisa Jucca

LONDON, Aug 26 (Reuters) - The dollar could revisit post-World War Two depths against the storming yen if it breaks key support at 108.25 and the Bank of Japan fails to intervene.

Chartists said on Thursday that the dollar's drop to a seven-month low near 110 yen this week had brought the U.S. unit in sight of 108.25 yen, the 1999 low hit on January 11.

``Below there the (dollar) bullish trend falls apart and the dollar could potentially fall to 80 yen,'' said Brian Kiely, technical analyst at the Royal Bank of Scotland in London.

``If the BOJ does not intervene before, the fall would be so dramatic that they won't be able to cope with it.''

After slumping to 79.70 yen in April 1995, its lowest since the end of World War Two, the dollar embarked on a three-and-a-half year rally which culminated with an August 1998 peak of 147.63 yen.

Although the wide swings that followed had not so far damaged the long-term positive outlook for the dollar, chartists say, its prospects could turn gloomy if the yen continued to soar.

Ian Stannard, technical analyst at Chase Investment Bank, said that a drop below 108.25 yen would repidly drag the yen to 105.40 yen, a 61.8 percent Fibonacci retracement of the dollar rise from 79.70 to above 147. Further support was seen in the 93 yen and the 80 yen area.

Fibonacci levels are derived from a number sequence discovered by 13th century Italian mathematician Leonardo Fibonacci in his research into the reproductive cycles of rabbits, which many traders believe can be applied to price behaviour.

By 1115 GMT the dollar was trading at 111.55/60 yen, around one percent above Wednesday's seven-month trough.

The BOJ was spotted selling yen against dollar at least seven times since June 10, but has not intervened since July 21 despite a yen appreciation of nearly eight percent.

Analysts said as the dollar was approaching 110 yen level, the market had become increasingly wary of possible intervention.

``Technically 110 is not a support level, but it may be the trigger level for the BOJ to wake up to an intervention policy,'' said James Jordan, technical analyst at BankAmerica in Dublin.

``If the BOJ puts a base around 108.25 with intervention, it would send a good signal technically that the retracement is finished and that we are starting to rise again.''

Jordan said that 105.65 yen was the next support level in case of a breach of 108.25 yen, with a further prop at 103 yen, then 85.50 yen, the last threshold before the 79.70 yen trough.

Euro/yen risked a slump below mark/yen post-World War Two lows set in April 1995, which Reuters Graphics show at 58.20 marks.

This level corresponds approximately to 113.80 in euro/yen and is less than two yen away from a euro/yen life low around 115.50 yen hit on Thursday.

``Euro/yen is in a far worse state compared with dollar/yen because we have already broken various Fibonacci retracement levels here,'' said Jordan.



-- Gordon (g_gecko_69@hotmail.com), August 28, 1999

Answers

Read down to the part where it talks about "heavy repatriation of the yen". This is your alarm going off folks. If you want to sidestep our bubble burst here, there is no better sign, nor will there be. Currency markets lead not follow. You should too.

TOKYO, Aug 26 (Reuters) - The yen had a subdued session Thursday with supporters still smarting from an intervention scare, but most saw it as a mere pause in its uptrend. The dollar was supported overnight by the positive spin U.S. asset markets put on the Federal Reserve's rate hike, but it left many dealers in Tokyo shaking their heads in disbelief. "The markets picked on one phrase in the statement as confirmation the Fed will never hike again," said a European bank dealer. "We believe that's a sort of mass wishful thinking and it'll only take a couple of strong economic figures to bring them down to earth." By 0615 GMT the dollar was pinned at 110.94/98 yen after fading from a 111.23 high to come in line with Wednesday's 110.98/08 finish in New York. The euro edged up to $1.0440/45 from $1.0418/23 but remained weak on the yen at 115.75 yen after earlier hitting a fresh lifetime low of 115.53. The trader was referring to a line in the Fed's statement that said its two rate hikes together with the firming of conditions more generally in U.S. financial markets should markedly diminish the risk of rising inflation going forward.

But analysts in Tokyo noted that the relief rally in Treasuries had now taken 30-year yields to around 20 basis points lower than they were before the Fed first hiked on June 30. And, since many mortage rates were tied to this yield, monetary conditions, if anything, had loosened. Wall Street had also rallied to a new record high, promising to support consumer demand, and U.S. data on Wednesday was uniformly robust, with durable goods orders showing their fastest growth this year. Many analysts also expect key purchasing management and payrolls data next week to be just as strong. If so, it could force U.S. markets to reappraise the likelihood of another tightening and put the dollar under pressure again, they said. This was one reason the dollar failed to make any ground on the yen on Thursday even though the market was widely short of the currency after a month of fairly constant selling. Traders said offers were lined up as low as 111.30 yen and Japanese exporters and insitutions were waiting at 112.00 for a bounce to sell into. Bids were found in the 110.50/80 area, partly related to banks defending options positions, but most expected these to be overcome once the market consolidated. "There's talk of knockout options at 110.00 and a load of stops under there, which are a big attraction for dollar bears," said a dealer at a U.S. bank. "If they can get through these, there's a good chance of a run to 108.20." The 108.17 level was the quoted low from January and is a major technical target. The yen also had the euro under its thumb for much of the session after early sales by Japanese life insurers carved out a new low at 115.53. It found some support there, again rumoured to be options-related, but fresh selling emerged as Europe opened and a break to 115.00 was expected at any time. The Australian dollar is another currency to cave in against the yen amid talk of heavy Japanese repatriation. Analysts suspect investors in Tokyo are becoming increasingly worried by the risk of Y2K liquidity problems next quarter and are bringing funds home now. And they were tending to pick on currencies of countries with big trade deficits, such as Australia, New Zealand and even Britain to an extent. Sterling was close to three-year lows on the yen at 175.95/15, having tumbled from 186.00 in less than two weeks. In the same period, the Australian dollar has lost more than seven percent to stand at 70.01/11 yen in late trade. The 70.00 yen level is a key technical bulwark and analysts warn that a clean break would open the way to January's lows around 68.70 yen. If that went, the Aussie dollar would be back to levels not seen since 1995 and there would be a real risk of a retreat to support around 65.50. ((Wayne Cole, Tokyo Treasury Desk +81-3 3432 8584 tokyo.newsroom@reuters.com))

-- Gordon (g_gecko_69@hotmail.com), August 28, 1999.


Gordon, Thanks for your post. To the best of your knowledge, should the Japanese start taking home their yen, and considering that they are (from what I understand) one of our biggest lenders, would that not be inflationary for the US? Also, from what I've read, there is starting to be a liquidity problem in the US because of corporational borrowing ahead of y2k. Any comments on how this might add to the mix? Thanks

-- Richard (trubeliever@webtv.net), August 28, 1999.

>> To the best of your knowledge, should the Japanese start taking home their yen, and considering that they are (from what I understand) one of our biggest lenders, would that not be inflationary for the US? <<

Short answer: yes.

Think of it in terms of barter. If a big holder of wheat desperately wanted corn, and started trading wheat for corn as fast as they could, then the supply of wheat on the market would go up dramatically without any corresponding increase in the demand. The worth of wheat would plunge. OTOH, corn would become scarce and it would take more and more worthless wheat to get someone to trade some of their valuable corn for wheat. This is just as true in currency markets as in commodity markets.

The upshot is that large-scale yen repatriation would cause the dollar to lose value. A weaker dollar raises the price of imports. More costly imports means more inflation.

Another factor to consider is that the main way in which dollars are held is not as "cash" but as bonds. Often US Treasury bonds. Dumping dollars on the market means dumping bonds. This would weaken our government's ability to borrow at low interest rates, because their newly issued bonds would compete with their older bonds that have become a drug on the market. We'd have to raise rates to attract buyers. This would slow the economy considerably.

-- Brian McLaughlin (brianm@ims.com), August 28, 1999.


Brian, thanks for the explanation. I wonder if a weaker dollar would give manufacturers incentive to move their off-shore production facilities back home. How far down and how long does the dollar need to be depressed for this to happen? One of my concerns about Y2K- impacted supply lines was the high probability of shipping failure. No more cheap shoes from China or cheap TVs from Indonesia (assuming they are still useable) could mean no more of either item, because we essentially don't make them in the US anymore.

On the other hand, if yen repatriation makes the US dollar decline in value, would there be an offsetting purchase by investors in other countries who might still consider dollar based bonds to be a safe haven from domestic problems? Would we be replacing Japanese investors with other investors? I have read opinions from Y2K optimists saying something like this, and I don't know what would be the stronger influence.

- not an economist and don't have any long formulas to figure this out . . .

-- Margaret (janssm@aol.com), August 28, 1999.


Also not an economist, but think Brian's answer was/is on target. I think that's why the BOJ is in Jackson Hole right now, because the US wants to meet with them. The most disturbing thing about this developement is it's macro implications. Moves of this size while certainly inflationary can cause HUGE distortions in otherwise normal commercial operations with currency, credit and the ubiquitous hedge fund operation.

My chief concern has been, not inflation, but rather liquidity. This event has no parallel. Early on I looked at it very hard to determine if I would want to advise taking positions to make money on it. I analyzed the hell out of all the data, came up with scenarios etc. and in the end decided that this was a game in which the rules would be thrown out eventually. There simply is no way to quantify the risks involved here. It is my belief that most large commercial trading entities will come to the same conclusion, except for a few exceptional risk takers. Therefore, this will be an exceedingly dicey period of volatility for people who manage institutional money. A slow elephant can do just as much damage as a fast one, in some cases more.

The street clearly believes big Al won't raise rates thereby exacerbating the liquidity problems. I tend to agree. Inflation is really not his biggest concern right now. Fiscal viability and maintaing market integrity is. He will do whatever's best to keep the markets going.

-- Gordon (g_gecko_69@hotmail.com), August 28, 1999.



Personally I believe that y2k will cause inflation problems. Cut off imports and you have inflation. Yet Ed Yardeni predicts a deflationary recession. I've been unable to read his site as my primitive web-tv can't handle Adobe-Acrobat, so might someone please shed me some light as to why he thinks y2k will be deflationary? Thanks.

-- Richard (trubeliever@webtv.net), August 29, 1999.

The inflation or deflation question is a very tough one to answer.

The most likely scenario for inflation that I can foresee would be one where the world repudiated US bonds and the dollar, in favor of the yen and the Euro. This is entirely possible. The Japanese banking system is in deep trouble with bad debts, but they have been hiding their non-performing debts and holding onto their US Treasuries in order to strengthen their balance sheets. If the dollar continues to weaken and the yen to strengthen, this strategy of holding Treasuries may reverse itself. In that case the dollar tanks. A weaker dollar makes for higher inflation.

The deflationary scenario depends on a collapse of US asset prices, mainly a stock market crash, but a secondary real estate crash, too. In my opinion, if stocks were to return to 1990 levels such a crash in asset valuation would dwarf the inflationary effects of yen repatriation. The US banks would be overwhelmed with bad debt as a result. At that point, liquidity is gone. Vanished. Dead. Dollars would soar in value relative to commodities, because everyone would need them to pay off their debts.

In my estimation, the inflation scenario only works if the asset valuation bubble doesn't burst. The same actions that could cause the inflation scenario would almost certainly trigger a stock market crash. At that point deflation trumps inflation. At least that is how I see it. This is also the one Alan Greenspan appears to be thinking about, as seen in his speech in Jackson Hole a couple of days ago.

-- Brian McLaughlin (brianm@ims.com), August 29, 1999.


Brian, Thanks for your answers and keeping up with this site. Your answers pertaining to inflation/deflation come from what the stock market might do. Would'nt we get inflation should non-stock market events take place? Primarily if imports abruptly cease to reach our shores due to y2k problems? Would'nt higher oil prices due to a lack of oil reaching our shore also cause inflation? etc. etc. From what I understand we import faaaaar more than we export. Thanks

-- Richard (trubeliever@webtv.net), August 29, 1999.

As far as I can foretell (I am NOT a psychic) if asset valuations in the USA stay within roughly 15%-20% of where they are now, then inflation is the most likely outcome of Y2K in the next year or so. However, if I were to place a bet, I'd bet at least modestly on the asset bubble bursting with more vigor than a mere 20% decline in stocks.

Please note that I am nowhere near infallible I was quite worried over the state of the stock market well over a year ago. Then again, so was Warren Buffet, so I don't feel too lonesome and foolish over that mistiming. :)

-- Brian McLaughlin (brianm@ims.com), August 30, 1999.


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