The Japanese carry trade has been subsidising the rest of the world, and in particular the USA, for some time. Yields on Japanese bonds have been rising and the Japanese are cashing in US Treasuries and investing back home:
Because suddenly, the cheat code stopped working. The math that made the carry trade profitable for 30 years just flipped upside down. Japanese pension funds looked at their spreadsheets and realized they were losing money on US Treasuries.
So they started selling. Billions of dollars’ worth. Every single day.
Tomorrow The Fed. Will start QE to soak up these Treasuries being sold by Japan and others:
The Federal Reserve has said it will launch a $40bn short-term bond-buying programme just weeks after it stopped shrinking its balance sheet following repeated bouts of strain in money markets.
That explains why Financial Stress has been rising even though monetary conditions are loose.
Powell stressed that the bond purchases were not part of the Fed’s monetary policy mix and did not mark a return to large-scale purchases of long-term debt used to stimulate the economy. They aren’t re-instituting QE, just trying to prevent a financial crisis caused by lack of short-term liquidity.
Wendy
Quantitative easing is a process in which a nation’s central bank (such as the Bank of England or the U.S. Federal Reserve electronically creates new money to buy a large amount of financial assets, typically government bonds and sometimes corporate bonds, from other financial institutions.
It’s just semantics Wendy. I always apply the ‘duck’ test in economics:
If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.