We have made no secret of the fact that the entirety of the Japanese Prime Minister Abe economic recovery program is predicated on the foundation of a weak currency. The effectiveness of that program has now become suspect mainly due to an 8% increase in the value of the Yen against the US Dollar since the beginning of this New Year.

Both Prime Minister Abe and his counterparts over at the Bank of Japan are attempting to push Japan out of its deflationary spiral by generating an annual rate of inflation of 2%. That cannot happen if the Yen keeps moving relentlessly higher.

Keep in mind that this upward movement in the Yen is also taking place at the same time that China has been working to devalue their currency, namely the Yuan. That works to undercut the competitiveness of Japanese products here in the US in comparison to those goods produced in China destined for sale here as well.

This is not being lost on either the Bank of Japan and the Abe government both of which have been increasingly been making verbal noise about the yen rally.

As explained in my post from yesterday, the problem that the Bank of Japan has is the sheer size of the Yen carry trade. All of that massive amount of money created by the various world Central Banks with their Quantitative Easing programs has had to go somewhere. That “somewhere” has been into various asset classes [mainly stocks]. That was exactly what the CB's intended.

The idea was that the combination of ultra low interest rates would force investors into equities as the only game in town for obtaining yield in a near Zero Interest Rate Environment which would have the INTENDED EFFECT of pushing stock prices inexorably HIGHER and creating as a desired goal, ” A WEALTH EFFECT”.

The theory behind this being that consumers are much more likely to take on new debt [with lower interest rates spurring them on] if their stock portfolios in their 401K's and ira's were constantly moving ever onward and upward.