Has The First Currency Crisis Already Begun?

 | Jan 28, 2013 12:45AM ET

As many of you who have read my work in the past know, I expect the eventual endgame to this whole Keynesian monetary experiment that has been going on ever since World War II, to finally terminate in a global currency crisis. I'm starting to wonder if we aren't seeing the first domino start to topple.

I'm talking about the Japanese yen, of course.

I think everyone just naturally assumes that the yen is dropping in response to Prime Minister Abe's intent to imitate US policy and print its way out of its troubles. The problem with this strategy is of course, eventually Japan will break its currency. Japan is in a particularly tenuous situation in that their debt to GDP dwarfs most of the rest of the world. The only hope they have of servicing this debt is for interest rates to stay basically at zero.

Any move by interest rates above this artificially low level and Japan's debt becomes unserviceable, without resorting to a greater and greater debasement of the currency. Unfortunately that will also result in an acceleration of the collapse of the currency, which would just cause Japanese bonds to be sold even more aggressively--a nasty catch-22 situation.

At this point there is no way out for Japan. The only question is when will the endgame arrive. Japanese bond bears have been asking themselves that question for almost two decades.

The recent move in the yen has started me wondering if that end game hasn't now begun.

In the chart below I have marked the successive yearly cycle lows with blue arrows. As you can see, this major cycle bottom tends to arrive between March and May most years. If the 2013 yearly cycle low arrives in the normal timing band, then there may be a big problem developing with the Japanese currency.

I say this because the Japanese yen is basically already in free fall and we may still have another one-to-three months to go before a final bottom.