Japanese Torpedo Stock Market and Dollar

The Japanese yen carry trade financed the global bull market at the dawn of the 21st-century and the rising yen ─ like Japan’s rising sun on its flag in World War II ─ torpedoed the bull market and U.S. dollar.

Today anyone with access to a global custodian can borrow short-term money in any major country. At Japan’s ultra-cheap interest rates, it made sense to borrow there rather than where interest rates are higher. People did, from all over the world, selling yen and moving the money to higher-yielding countries to invest, picking up the interest rate spread. To do so, they had to also buy that new currency. The process pushes the yen down and other currencies, including the dollar up and is called the yen carry trade. The result is the Bank of Japan was financing the global bull market directly without meaning to. When the bank increased its interest rate materially, it pushed the price of the yen up and killed the yen carry trade ─ and the dollar.

Nevertheless, the power to influence the fate of the dollar lies increasingly with the oil producers ─ not China. China’s dollar reserves are so huge that it will find it hard to reallocate them without causing mayhem in the markets and becoming the biggest loser of all.

It is time U.S. career politicians stop blaming and scapegoating China for all that ails America and start putting the blame where it belongs ─ on Japan and Arab oil producing countries, starting with Saudi Arabia, the leading oil producer that also produced Osama bin-Laden and his fanatical religious suicide bombers.