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Butterfly effect

The Japanese Yen keeps weakening and it’s approaching 160 vs the U.S. dollar. Why is that relevant? In a global interconnected martket where investors are allocating capital with a global approach, the impact of any dislocation outside the U.S. will be felt almost immediately. Second of all, suden weakness in a countries currencies is a symptom that indicates something is wrong. In the case of Japan, its debt to gdp is 263%, but more importantly, 43% of JGBs are owned by the Bank of Japan. In other words, the central bank has printed money to buy debt, to produce inflation after decades of deflation and disinflation. An important collateral damage of massive money printing is the weakening of their currency. How do you get out of that vicious cycle? Japan can raise rates, but it will crush the economy or it could sell US treasuries. Japan is the biggest UST holder with $1.1Tn. If they were to sell half of that position to repatriate the proceeds and cancel some of the debt they own, it will have a devastating impact on the U.S.

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