Wednesday, September 10, 2014
Japanese Yen Heading For Hyperinflation
The Yen is down more than 4% in the last month against the dollar.
The 10 year Japanese Government Bonds (JGBs) pay 0.54%. So losing 4% in value is about like losing 8 years worth of Interest. If you can lose 8 years worth of reward in one month, the risk and the rewards are way out of whack.
The demand for JGBs is very low. Many of the buyers are really just front running the central bank. The central bank has driven some rates below zero. Investors and traders are happy to hold bonds while interest rates are going down because the value of the bonds goes up. With interest rates below zero, it is time to get out.
In the Aug 31 report from the Central Bank of Japan, they had increased their balance sheet by 1.1% in the previous 10 day period. This is printing money at hyperinflationary rates.
I think Japan is falling into the grip of the positive feedback loops of hyperinflation. It does not make sense for investors to roll over JGBs. As people don't roll them over, the central bank becomes more and more the only buyer. But it is buying with newly made money which makes holding bonds an even worse investment. The more new money, the less people will want to hold JGBs or the Yen. But the less people hold, the more the central bank will make money to buy JGBs. Seems like the death spiral is starting to circle for the Yen.
A big part of the last month change is really that the US dollar has gone up. So one could argue that it is not the Yen going down but really the dollar up.
Right now Great Britian may be losing part of their tax base to independence. If Scotland leaves, Northern Ireland may follow. The Euro has gone even more crazy with printing money. So maybe it is that the Pound, Euro, and Yen are all going down and not that the dollar is really going up.
If an expert saw water coming through a gopher hole in an earth dam he could tell you for sure that the dam was going to fail very soon. Once the positive feedback loop for dam failure starts, it is just a matter of time. I wish I was such an expert that I could tell you for sure that the positive feedback loops for Yen hyperinflation have started, I really think so, but I can't tell you for sure.
Full disclosure: Author is short Yen.