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Friday, October 7, 2022

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Turning Japanesa

By Michael Pento – Pentonomics – Euro Pacific Capital  

turning japanese - the vaporsBernanke may be turning Japanesa, or maybe it is that Japan is turning Bernankenesa? I’m not entirely sure. But either way the punk band called The Vapors was extremely prescient with that hit song recorded back in 1980. The Bank of Japan already had interest rates near zero percent, (Ben followed that lead nicely) but now their central bank has poured in an additional 31 trillion Yen worth of liquidity in the last four days alone. Such an affinity for counterfeiting would even make Ben blush.

But the sad truth is that the BOJ should instead embrace and allow currency repatriation to dramatically increase the value of the Yen in order to help defray their massive rebuilding costs. What they are instead doing is stemming the rise in the Yen, which will at the very least guarantee that the cost of imported goods will be higher than it otherwise would be. A significantly rising Yen would allow the Japanese to go on an international shopping spree that would offer an across the board sale of the commodities needed for their reconstruction. Since Japan doesn’t have many natural resources, the falling cost of imported crude goods could help lower the prices of exported finished goods and thus help offset the impact that currency dislocations would have on their trade balance.

Although the Yen is currently rising, I expect it won’t last very long. Once the wave of repatriation subsides, the massive money printing done by the BOJ will work its black magic. For a country with a national debt that is already at 200% of GDP, more debt at higher service costs is the last thing they can tolerate. A weaker Yen only exacerbates that overleveraged condition.

For the U.S. the ramifications are clear. Japan owns about $900 billion dollars worth of our debt and most of their savings will be needed for domestic reconstruction costs. Therefore, less Yen will be converted into dollars and diverted into our bond market. That should mean higher interest rates are in store for the U.S. It could also mean that the Yen may not fall vis a vis the dollar.

Bernanke is already doing is very best to cause inflation to spike and yields to rise. Very soon he may have the full cooperation of the second largest foreign holder of U.S. debt.

An integrity check for the Fed was given today courtesy of the Consumer Price Index. The CPI rose 0.5% in February on a month over month basis and increased 2.1% year over year. Bernanke is on record saying that inflation should be around 2% or a little less. Now the last time I checked 2.1 was greater than 2 or less. Of course, Bernanke could always copout and say the core rate (up 1.1% YOY) is the only metric to look at. However, we all know that year over year measurements take out volatility by definition. So like it or not, even if using the corrupted CPI measurement, inflation is over Ben’s purported comfort zone.

Bernanke and the BOJ share the same “YEN” to depreciate their currencies and to seek inflation. Given that bilateral mistake, it may be wise to diversify out of dollar and yen based assets.

Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.  

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