The Future of Foreign Exchange Markets - Episode 127 [Tomotaro Tajima]
Tomotaro Tajima Profile
Economic analyst. Alfinants President and Representative Director. Born in 1964 in Tokyo. After graduating from Keio University, he changed careers from Mitsubishi UFJ Securities, where he previously worked, and now analyzes and researches a wide range from finance and economy to strategic corporate management, and even individual asset formation and fund management. He serves as a lecturer for lectures, seminars, and trainings organized by private companies, financial institutions, newspapers, local governments, and various business associations, with about 150 lectures annually. He has written numerous serialized pieces and comments in print media, such as Weekly Gendai’s “Rules of Net Trading” and Examina’s “Money Maesto Training Course.” He has also written columns on numerous websites concerning stocks, foreign exchange, etc., and is highly regarded as a stock and forex strategist. He also writes in the Home Economics section of the Shigesan Kokuminsha’s “Basic Knowledge of Modern Terms.” After appearing regularly on television (TV Asahi “Yajiuma Plus,” BS Asahi “Sunday Online”) and radio (MBS “Wachi-chan’s Asaichi Radio”), he currently serves as a regular commentator on Nikkei CNBC’s “Market Wrap” and Daiwa Securities Information TV’s “Economy Marche.” Major DVDs include “Very Easy to Understand: Tomotaro Tajima’s FX Intro” and “Very Easy to Understand: Tomotaro Tajima’s FX Practical Technical Analysis.” His major books include “Wealth Reassessment Manual” (Pal Publishing), “FX Charts ‘Profit’ Equation” (Alchemix), and “Why Can FX Make You Asset Rich?” (Texts), among many others. The latest publication is “How to Profit by Riding the Rising U.S. Economy” (Shinjiyukenminsha).
※This article is a reprint/edit from FX攻略.com November 2020 issue. Please note that the market information stated in the text may differ from current market conditions.
Has the likelihood of a bubble increased due to the FRB policy framework review?
On July 27, in a speech at the annual Jackson Hole Conference, Federal Reserve Board Chair Jerome Powell referred to a new framework for monetary policy, mentioning an inflation target of “an average of 2%,” and disclosed a plan to tolerate inflation temporarily above 2% during downturns.
In other words, the FRB intends to keep interest rates low for a longer period than previously anticipated, and once that content was conveyed, the U.S. stock market generally trended higher.
Of course, it was largely expected that such a policy would be announced, and the market had already priced in much of it. In other words, at that point there was a temporary “buy the rumor, sell the fact” dynamic in the U.S. bond market, and as a result, the U.S. 10-year Treasury yields jumped to the 0.75% range, and the dollar roughly retraced broadly for a time.
Nevertheless, the main driver of market volatility remains the possibility that the FRB’s low-rate policy will be extended longer, so investors cannot simply ride a dollar-buying wave. Even if U.S. stocks and bond yields remain firm, it does not necessarily mean dollar buying is the right course, which remains a dilemma for investors.
In the longer term, however, the FRB’s policy decisions and public disclosures are likely to increase the probability that the economies of the United States and other major countries may exhibit bubble-like characteristics in the future.
From the outset, the COVID-19 crisis has led central banks in major countries to inject funds at an unprecedented scale. As already reported, the total assets of the Bank of Japan, Federal Reserve, European Central Bank, and People’s Bank of China were projected to expand to about 2,400 trillion yen by the end of 2020, about 1.5 times the level at the end of the previous year.
Of course, the measures were taken to temporarily compensate for the negative effects of the disappearance of physical demand and disruptions in supply chains during the pandemic and to enable eventual recovery. Once the pandemic subsides, a large portion of the vanished demand and supply chains are likely to physically recover.
On the other hand, even if the pandemic ends, it will not be possible to rapidly unwind the funds that were pumped into the economy. In fact, the Fed says it will tolerate inflation for a while and will not normalize monetary policy hastily.
In other words, even if the bubble flame flares in the future, authorities will not readily move to burst the bubble. Even if many experts increasingly recognize a bubble, authorities will not admit it. That is also proven by the history of past bubbles.
