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The Bank of Japan has Punted, and In So Doing, Has Created Some Potentially Serious Challenges for Itself in the Financial Markets


Now that the BOJ has "spoken," let's notice that USD/YEN is positioned ominously downward, and points towards a test of its June-August lows at 99.25/54, which if violated, should trigger downside continuation that projects next into the 96.00-95.00 target zone.

Such a scenario by definition will strengthen the YEN, which will adversely impact the ability of the Japanese economy (and the BOJ) to engineer some inflation to help the government meet its 2% inflation target.

In addition, if such a scenario begins to unfold, it will greatly increase the likelihood of BOJ intervention to push the YEN lower (lift USD/YEN), and could set up a major confrontation between global speculators who are entrenched in the 15-month downtrend in USD/YEN (uptrend in YEN), and the BOJ.

Otherwise, let's also notice that as we speak, 10 year JGB YIELD is negative 2.7 bps, just beneath The ZERO Rate that BOJ identified today as the new "cap" on benchmark rates.

The July-Sept upmove from -30 bps to ZERO has the right look of a major low followed by the initial upmove of a significant recovery rally period in JGB YIELD.

Here too, similar to the situation that is developing in USD/YEN, the BOJ might be faced with defending the ZERO line-in-the sand along with 100 USD/YEN. The BOJ had better win these battles if the efficacy of the central bank is to remain intact.

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