A story
in the Times of London, that the Bank of Japan has ended its policy
of dollar intervention, has been officially denied by the Japanese Ministry
of Finance. It has been speculated that the story indicates a rift between
the BOJ and the government, or perhaps, that the Japanese administration
has decided on a policy change, which for political reasons, it is not
yet ready
to announce officially. Whatever the reasons, one has to believe that big
changes are coming. In my opinion, it is likely that BOJ officials, staring
into the
currency intervention abyss and seeing nothing but their own reflections,
have finally declared “no mas.”

For the United States, the implications of such a change in policy are staggering.
Bank of Japan currency intervention is the single biggest factor restraining
increases in both U.S. interest rates and consumer prices, and by extension,
the most important prop for the economy in general, and the housing and the
stock markets in particular. Without that support, both interest rates and
consumer prices would surge, and the economy, housing and stock prices would
collapse. The old saying that no one rings a bell at market peaks may not apply
here. If true, this Times of London article is the Big Ben of all bell ringing
for the U.S. bond market.

The denials from the Ministry of Finance prevented the dollar
from plunging below 105 yen. However, if such a policy change has in fact
been made, there
are many reasons why Japan would keep it quiet. After all, absent actual intervention,
the only thing left keeping the dollar afloat would be the fear of intervention.
Certainly the Ministry of Finance would at least want to keep that fear alive.
So if a new stealth policy change had indeed been leaked by an unnamed source
at the BOJ, it certainly makes sense that the Ministry of Finance would deny
the “rumor.” But as the saying goes, “where there’s smoke there’s
fire.” Either way, this denial tells us nothing about the true status
of Japan’s currency intervention policy. The proof of the pudding is in the
market itself, which has seen a dramatic slowdown of Japanese intervention
over the past few weeks, and a twenty-five basis point rise in the yield on
ten year U.S. Treasuries.

What is more important than the status of the policy is the fact that the
U.S. economy is so dependent on that policy in the first place. If, in fact,
this policy shift has not yet happened, it certainly must occur at some point
in the future. Regardless, the day will come when the United States will no
longer be able to rely on largess from Japan to support its massive fiscal
imbalances and inflated standard of living. The only question remaining is:
has that day already arrived?