The Yen carry trade has blown up. And stocks are about to play “catch up” to the downside.
If you have been long US stocks since Election night, you have been a Yen bear and nothing else.
Last September the Bank of Japan announced a new policy of targeting a 0% yield on its 10-Year Japanese Government Bonds. Many in the investment community took this to represent a “tightening” of policy.
It was no such thing.
Targeting a 0% rate on 10-Year JGBs opens the door to unlimited currency devaluation as the Bank of Japan prints Yen to buy JGBs.
Note the collapse of the Yen that followed this announcement.
This policy was implemented strictly to devalue the Yen which had been appreciating rapidly due to the BoJ’s policy mistake of implementing NIRP earlier in 2016 (NIRP is highly deflationary as both the BoJ and ECB have discovered).
Since this time, the Yen has been the single largest driving force for the markets, as Gold and Bonds sold off and the $USD and US stocks rallied based on the BoJ’s interventions.
