Written by: Anonymous

The global financial markets achieved a milestone overnight - the Yen crossed 105 to the USD in Tokyo trade and has strengthened further to trade slightly under 104 in NY at the time of this writing.

So, why is 105 such a big deal? The Ministry of Finance has long broadcasted that 105 was the "line in the sand" for this export dependent economy. It is no secret that the Bank of Japan is the champion of open-market currency intervention, and has been effectively a perma-bid for USD over the past several years. But their thirst for USDs (in the form of US Treas) has reached heretofore unseen levels of late, all in an attempt to protect the flooded glow plug of a '73 Mercedes diesel that is their economy.

Then they stopped. Out of nowhere. Why?

Well, lets just say that they built an IMPRESSIVE position in treasuries, to the tune of $350 billion, over the last twelve months (prevailing market consensus puts the estimated cost average at 113). The BOJ effectively became price sensitive - as they were witnessing that their attempt to support the dollar, albeit unprecedented, was working about as well as the Al Sharpton '04 Pro-Am out at the west course of the Westchester CC.

At 105, the market has estimated the losses for the WEAK YEN SONY DO WELL play to be around $27BB. Net this with estimated interest income of $5.5BB and things look bad. The BOJ has incurred a real economic loss of around $21,000,000,000. (This only speaks to their marginal position and says nothing to any previously existing position)

The bond market is now wondering whether Japan will blink. Here is why we need to worry about this: If the Ministry of Finance becomes sensitive to these capital losses and the BOJ begins to unwind $350 BB in US Treasuries, rates will move. Up. And there is nothing, nothing, that the Fed can do about it. When I have time, hopefully soon, I’ll discuss the implications, and they abound, due to the perverse proliferation of derivatives by guys who graduated "cum laude" from Metropolitan State University (lookie here, I can lay of RISK), of a spike in treasury yields for our financial system.