In this post we are going to touch on another point about the effects of the MoF actions.

Let’s start.

The Fragility of the UST market 

First of all when the USTs are in the account of the MoF at the FRBNY, they sit there and do not need to be absorbed. 

However when the MoF sells those they do need to be absorbed in the system. And the problem is that those USTs have duration risk. The Treasury knows the existence of this problem and so does Mr. Gundlach who is telling everyone who wants to listen to avoid the 10 years and the 30 years. 

And Mr. Gundlach has provided figures about the problem. He has explicitly highlighted that the percentage of new US Treasury issuance on the ultra-long end is abysmally low, landing at less than 1.5% to 1.7% of total issuance. The Problem is that this is precisely this type of securities that are sold by the MoF

The BIS is explaining that today the concentration of ownership of those long-dated treasuries is concentrated in the hands of hedge funds doing the basis spread.

Data from the Bank for International Settlements (BIS) and recent Federal Reserve research confirm that hedge funds' gross Treasury exposure has exploded to a massive $4.0 trillion. Strikingly, hedge funds absorbed roughly 37% of all net issuance of longer-dated Treasury notes and bonds. 

However, hedge funds do not hold any duration risk. While they are legally buying the actual physical, long-duration 10-year and 30-year bonds that Japan is shedding, they are immediately neutralizing the duration through derivatives

The Bank for International Settlements (BIS), alongside other global regulators, considers the concentrated leverage of hedge funds in Treasury markets a top-tier systemic risk, often labeling it a dangerous "sovereign-financial stability nexus". This structural fragility stems from high-leverage basis trades, where funds use repo markets to amplify capital, risking a forced, cascading liquidation if funding markets experience a sudden shock. More information is available from Reuters regarding the BIS warning. 

But in fact a mismatch and blow-up has happened before in the UK between the cash securities and the futures during the Lizz Truss episode. And it has been documented that tariffs tantrum had a negative effect on the swap spreads on which hedge funds were betting and that spilled over into the cash versus futures prices of those long dated treasuries.

We are providing this background to help readers remember what is the context in which the MoF is dumping duration. (fish is good for memory, alternatively there is GraphFinancials)

1. The Pre-April 2025 Setup: The Leveraged "Swap Spread" Trade

While everyone was watching the cash-futures basis trade, hedge funds had simultaneously built a massive $305 billion concentrated bet in the swap spread arbitrage market. 

• The Thesis: Funds expected the Trump administration to loosen banking regulations, which would allow commercial banks to buy more Treasuries. 
• The Position: Funds wagered that Treasury yields would drop relative to equivalent interest rate swaps. Since a swap spread is defined as (Swap Rate − Treasury Yield), they were heavily positioned for swap spreads to widen (move higher). 

2. The April 2025 Catalyst: The Tariff Shock

On April 2, 2025, the U.S. administration unexpectedly announced sweeping, massive tariff hikes that caught the market completely off guard. 

• The Instability: Rather than a simple flight-to-safety, the market realized massive tariffs meant a global trade war, inflation, and a massive supply of new U.S. debt.
• The Yield Spike: Long-term U.S. Treasury yields soared violently.

3. The Blow-Up: Diving Swap Spreads and Dislocation

Because Treasury yields soared much faster than interest rate swaps, the math flipped upside down. Swap spreads dived and collapsed vertically, completely decimating the hedge funds' multi-billion-dollar positions. 

[Tariff Announcement] ──> [Long UST Yields Rocket] ──> [Swap Spreads Collapse] ──> [Violent Margin Calls] ──> [Forced Liquidations] 

4. Market Implications and Response

The Forced Unwind: Approximately $60 billion of this swap spread arbitrage position unwound rapidly in a matter of days. 

The Margin Call Cascades: Hedge funds faced massive, instantaneous margin calls from their prime brokers. To raise emergency cash, they were forced into a "dash for cash," aggressively dumping physical, long-duration Treasury bonds into a illiquid market. 

The Cash vs. Futures Dislocation: Because hedge funds were panic-selling physical cash bonds to meet margin calls, the cash Treasury market suffered a severe drop in liquidity. This created a violent structural dislocation where physical bonds mispriced wildly against the electronic Treasury futures trading on the CME. 

The April 2025 Tariff Tantrum proves:

1. Hedge Funds Aren't Investors: They didn't hold those long-duration bonds because they liked them; they held them on extreme leverage. The moment the derivative math changed, they treated those bonds like toxic waste and dumped them.
2. The Plumbing Rules Everything: A political announcement (tariffs) traveled through a macro plumbing line (swap spreads), hit leveraged balance sheets (hedge funds), and caused a systemic structural risk event in the world's safest asset class.

Further Problems in the UST market 

In the second half of last year in 2025, it was documented that UST market in repo was under strains due to excess issuance of UST and a good reason for the Fed to “manage reserves” aka absorb more treasuries otherwise the SOFR would be unstable.

The Dynamic: Rebuilding the TGA and Clearing Out the ON RRP

To understand why SOFR broke down in the second half of 2025, we have to look at the three major interconnected pools on the liability side of the Fed's balance sheet: Bank Reserves, the Treasury General Account (TGA), and the Overnight Reverse Repurchase Facility (ON RRP). 

• The Squeeze: Throughout 2025, the U.S. Treasury was issuing debt at a record-shattering pace. To clear those multi-billion-dollar auctions and rebuild its checking account (the TGA), the Treasury was siphoning cash directly out of the private banking system. 
• The Buffer Dries Up: Initially, this cash drain didn't hurt bank reserves because the money was being drained out of the Fed’s ON RRP facility. The ON RRP acted as a massive liquidity cushion. 
• The Cliff: By late Q3 2025, the ON RRP facility was completely depleted. With that safety buffer gone, any subsequent Treasury auction was forced to pull cash directly out of Commercial Bank Reserves. 

2. The Q3/Q4 2025 Breaking Point: The SOFR Spike

On September 15, 2025, the system hit a structural wall. A massive wave of corporate tax payments coincided with a heavy settlement date for newly issued Treasury debt. 

• The Interbank Shock: Primary dealer bank balance sheets were completely flooded with newly issued, physical Treasury bonds. Because dealers are required to finance these bonds overnight, they scrambled into the repo market to borrow cash. 
• The Bizarro Pricing: The sudden, overwhelming demand for cash caused SOFR to violently spike to 4.51% (a 2025 high), printing a massive 18 basis points higher than the uncollateralized Effective Federal Funds Rate (EFFR). 
• The Basis Trade Contagion: This spike in repo rates wreaked havoc on the multi-trillion-dollar hedge fund basis trade we discussed. Because hedge funds borrow cash overnight via repo to hold long-term bonds, the soaring cost of SOFR overnight financing turned their razor-thin arbitrage profits into catastrophic, immediate losses. 

3. The Fed’s Pivot: From QT to "Reserves Management"

This SOFR volatility sent a clear signal to the FOMC: bank reserves had officially transitioned from "abundant" to "scarce," threatening the Fed's control over its target interest rates. 

To prevent a total rerun of the catastrophic September 2019 repo market crisis, the Fed executed an emergency pivot: 

• Ending QT: The Fed stopped letting its domestic bond portfolio shrink, completely concluding its Quantitative Tightening campaign in December 2025.
• Active Reserve Management: The Fed transitioned to organic asset purchases. Under "reserve management," the Fed regularly buys short-term Treasury bills to inject fresh, digital bank reserves (M0) back into the commercial banking system. This action matches the natural growth of the economy and offsets the structural cash drains caused by the Treasury's relentless debt issuance.

The Final Connected Reality 

[Record UST Issuance] ──> [ON RRP Empties] ──> [Bank Reserves Drained] ──> [SOFR Spikes Bizarro] ──> [Fed Permanently Halts QT] 

Well the type of treasuries that the MoF is selling are the long duration type, so if Gundlach does not like those who should? Uber leverAged Hedge funds betting on a backstop from the Fed? Probably. And that results in more monetization of UST aka debasement of the USD. 

So in your short Yen/ Long USD, there is a problem in my opinion on the Long Leg of the USD trade, because the monetization from the Fed won’t go anywhere with Japan dumping more duration.

Now granted when the MoF sells those long duration UST they get USD which ends in the balance of the Japanese banks at the same FRBNY.

Those evidently re-invest those USD into UST with a yield but of short duration. That’s the stuff Gundlach likes.

Let’s look at the Yen leg shall we?

The Mof Strengthens the Japanese Banks 

Why Banks are Eager to Sell Yen to the MoF

Japanese Commercial banks are not being forced to give up their yen; they are willingly participating because the MoF is offering an attractive price. When the MoF enters the market, it aggressively bids up the price of the yen. Traders at global banks see a massive buyer willing to pay a premium for yen, so they happily clear out their JPY inventories to capture the quick, guaranteed liquidity and lock in a profit.

The Japanese banks to conduct their dollar operations need dollar and that means they enter into swap contracts which cost them money on the liability side of their balance sheet. But with with those MoF operations things change drastically.

Part 2: What happens to the $75 Billion USD Cash in Commercial Banks?

The $75 billion USD cash doesn't just disappear. It stays inside the commercial banking system, but it causes a global shift in liquidity.

The banks that sold the Yen to the MoF are now holding a massive mountain of US dollars. They have two main paths for what they do with it next:

Path A: The Banks Lend the USD to the Global Interbank Market

Japanese banks are massive players in global trade and finance. They take that $75B cash asset and put it to work:

• They lend it to global corporations needing USD.
• They swap it with other global banks via FX swap markets.
• They invest it in short-term US dollar money markets (like US Repo markets or Eurodollar deposits) to earn interest.

Path B: The Banks Buy US Treasuries (The Dynamic Cycle)

This is the ultimate irony of FX intervention. The MoF sold USTs to get dollars. Now, global commercial banks are sitting on massive piles of USD cash earning zero interest.

To make a profit, these commercial banks go out into the open market and buy US Treasuries themselves.

But now that those banks have short term US gov securities they don’t need to pay for those swaps so in fact this move from the MoF increases the profitability of the banks, makes them more flexible and liquid in providing USD financing. 

What the MoF is doing is actually bolstering the banks. 

The Real Shift: Wholesale Funding vs. Official Reserves

While the net dollar amount is unchanged, this transaction fundamentally changes the behavior of those dollars in the global plumbing:

• When the MoF held it: It was "Static Reserve Capital." It sat quietly in the Fed’s Foreign Repo Pool or in official custody.
• When the Japanese Commercial Bank gets it: It becomes "Wholesale Banking Liquidity." Because Japanese banks have massive existing structural dollar liabilities (from funding global trade, foreign corporate loans, and non-yen investments), they immediately plug this USD cash into the global interbank market.

They will use it to fund FX swaps, buy short-duration T-bills, or lend it right back out into the repo market to earn a yield. The dollars stay entirely inside the Japanese system's footprint, but they pivot from being passive sovereign reserves to active commercial bank funding.

The real structural meat of this transaction is how it fundamentally alters the cross-currency FX swap market, specifically lowering the cost for Japanese commercial banks to fund their massive global dollar assets. 

Here is exactly how getting that USD cash from the MoF collapses swap funding costs for Japanese banks. 

The Structural Problem: The "Yen Basis" Premium

Under normal conditions, Japanese commercial banks have a massive structural problem: they own trillions in global USD assets (loans, foreign bonds, corporate debt) but their natural deposit base is entirely in Japanese Yen. 

To fund those USD assets without taking on catastrophic currency risk, they must constantly borrow USD via the FX Swap Market: 

1. They lend Yen to global counterparties (like US hedge funds or international banks).
2. They borrow USD in return, promising to reverse the trade at a future date. 

Because everyone knows Japanese banks desperately need dollars, global counterparties charge them a premium. This is the negative FX choice-of-currency basis. Japanese banks are forced to pay a high implied interest rate to borrow USD via swaps, eating directly into their profit margins.

How the MoF Transfer Collapses This Cost

When the MoF executes Step 1 of the loop and hands USD cash directly to the Japanese commercial banks in exchange for Yen, it magically solves the banks' dollar funding problem through two distinct mechanisms:

1. Direct Elimination of Swap Dependence

The most immediate effect is substitution. The Japanese banks just received pure, unencumbered USD cash directly from the MoF.

• The Result: The banks no longer need to go to the open market to borrow that specific block of dollars. Their demand for global FX swaps drops instantly. When demand for a loan drops, the price (the swap premium) falls. 

2. Japanese Banks Become the Absolute Liquidity Providers

This is where the plumbing loops back to the hedge funds mentioned earlier. The Japanese banks are now sitting on a mountain of USD cash, but they still have their structural Yen liabilities. They need to put those dollars to work safely and quickly. 

They do this by entering the FX swap market from the opposite side:

• The Japanese banks now step up to the window and say: "We have USD cash. We want to lend it out in exchange for Yen."
• The Counterparty: The US hedge funds executing the basis trade desperately need USD to fund their long-duration UST positions

The Ultimate Dynamic: Transmuting Reserves Into Commercial Funding

This change takes Static Sovereign Reserves (USD sitting idle at the Fed's Foreign Repo Pool under the MoF's name) and transforms them into Wholesale Commercial Funding.

The MoF gives the dollars to the banks, the banks' funding costs collapse, and the banks use that exact same USD cash to fund the very hedge funds that bought the Treasuries from the MoF in the first place. 

The domestic Yen M₀ loop is just the mechanical friction required to change the name on the dollar ledger from "Ministry of Finance" to "Commercial Bank Asset Desk."

Let's look at this strictly through a rigorous double-entry bookkeeping lens.

USD cash is an asset (Left Side). It cannot magically transform into a liability or equity (Right Side). 

When the Japanese commercial banks receive that USD cash from the MoF, it is a pure asset swap on the left side of their balance sheet, which replaces an existing funding drain. Here is the exact accounting ledger of how this transaction actually lowers their funding costs without adding any liabilities.

The Baseline: The Existing Left-Side Drain

Before the MoF transaction happens, a Japanese commercial bank already has a pre-existing structural mismatch:

To buy and hold their long-term USD assets on the left, they had to create a liability on the right: FX Swap Borrowing (USD).

To secure that swap liability, global counterparties force the Japanese bank to constantly post collateral and pay a premium, creating a continuous cash drain on the left side.

The MoF Transaction: The Pure Left-Side Asset Swap

When the bank participates in the 4-step loop with the MoF, the transaction is entirely a left-side event.

The bank hands over Yen M₀ (Asset) and receives USD Cash (Asset).

There is zero change to the right side of the balance sheet. No new liabilities are created. No new funding sources are added.

Increased Japanese Banks’ profitability

Why this Lowers Costs (Extinguishing a Right-Side Liability)

If it is just a left-side asset swap, how does it lower costs? It does so by allowing the bank to extinguish or offset its existing, expensive right-side liabilities.

Now that the Japanese bank has unencumbered USD Cash sitting directly on its asset side, it has choices it didn't have before:

1. Paying Off the Expensive Swap: The bank can use this new USD asset to pay off its maturing, expensive FX swap liabilities on the right side. The balance sheet shrinks, and the high interest cost of that swap instantly vanishes from the income statement. 
2. The FX Swap Asset Offset: If they choose to keep the right-side swap liabilities active, they take this new USD Cash asset and lend it out into the FX swap market themselves. They are now receiving the premium instead of paying it.

On the consolidated income statement, the interest expense from their old right-side funding is now netting out against the interest income from their new left-side USD asset.

The Rational Reality

The MoF does not provide a "funding source" on the right side.

Instead, the MoF provides a highly liquid USD asset on the left side that allows the Japanese bank to bypass, cancel out, or offset the expensive wholesale dollar liabilities it used to rely on. The domestic Yen M₀ round-trip simply clears the path to let this left-side asset swap settle.

What happens to the long duration asset the MoF sells?

The long-duration USTs held by the MoF do not directly enter the repo market from the MoF's side. In fact, for the broader global financial system, this entire sequence is a major net drain on USD liquidity.

For the Japanese banks, however, it is not a wash—it is a massive structural win that lowers their costs and alters their liquidity profile.

Why the MoF's USTs Do Not Go Into Repo

Sovereign wealth funds and finance ministries like the MoF do not behave like hedge funds. They do not actively lease out their long-term core reserves into the private repo market to chase a few basis points of yield.

• The Custody Reality: The MoF keeps its UST portfolio locked away in stagnant, passive custody accounts at the Federal Reserve Bank of New York (FRBNY).
• The Only Way Out is a Sale: The only way those specific securities move is when the MoF executes an outright, structural sale to a market maker or primary dealer to convert them into cash.

The Global Reality: A Severe USD Liquidity Drain

If we look at the entire global financial ecosystem (US + Japan), this transaction is the exact opposite of a liquidity injection. It is an aggressive liquidity squeeze for everyone else, which is precisely why the FX market experiences that volatile "hiccup."

1. The MoF Drains Cash: To settle the sale of the USTs, the MoF demands pure USD cash. This cash is pulled straight out of the private US financial system (out of the reserve accounts of US commercial banks clearing for the hedge funds).
2. The Collateral Bomb: The long-duration USTs sold by the MoF are dumped onto the balance sheets of US primary dealers and hedge funds.
3. The Squeeze: The hedge funds now have to find massive amounts of repo funding to carry this sudden avalanche of long-duration collateral. At the exact same time, the USD cash they need has just been handed over to the MoF and is currently traveling through the 4-step pipeline to Tokyo. 

(once again that smells more “reserves management” aka monetization / debasement for the Fed)

For Japanese Banks: Lower Costs And Better Liquidity

For the Japanese commercial banks, this is where the dynamic changes. It is not just a wash; it alters both their profit margins and their regulatory liquidity profile via a clean left-side balance sheet upgrade:

1. The Net Benefit: Crushing Funding Costs

As noted, the primary benefit is a massive drop in funding costs. By getting free, unencumbered USD cash on the left side of the ledger, they can instantly dismantle their expensive right-side FX swap liabilities. They stop paying the punitive "Yen basis" premium to Wall Street dealers.

2. The Regulatory Shift (HQLA)

Even though the total size of the Japanese banks' balance sheet does not change, the quality of their assets shifts dramatically under Basel III regulations: 

3. New "Internal" Funding Capability

While it isn't a new right-side funding source, owning pure USD cash gives the asset-liability committee (ALCO) of a Japanese bank immense operational freedom. Under normal conditions, if a Japanese bank wants to extend a new USD loan to a global corporate client, it has to go out and queue in the market to borrow a matching USD swap liability.

Now, they can fund that asset deployment internally using the USD cash asset they just acquired from the MoF.

Because the MoF transaction drains cash from Wall Street and dumps a mountain of long-duration UST collateral onto leveraged hedge funds, the US interbank funding market could seize up. To prevent a systemic breakdown or a repeat of the September 2019 repo crisis, the Federal Reserve is forced to step in as the buyer and lender of last resort. 

The Fed literally has to step in to "manage" the reserves by printing new money to buy back the very Treasuries the MoF just dumped. 

The Fed's Intervention: Reversing the Drain

When the US interbank system hits the "hiccup" window, the Fed has to execute specific balance sheet maneuvers to restore US liquidity:

1. The Repo Injection (The Temporary Fix)

As hedge funds scramble for cash to fund their new USTs, repo rates spike. The Fed opens its Standing Repo Facility (SRF) or conducts overnight repo operations. 

• The Mechanics: The Fed takes the UST collateral from the primary dealers/hedge funds and injects brand-new USD cash into their clearing accounts. This provides a temporary relief valve for the timing mismatch.

2. Open Market Operations / Permanent Reserves Management (The Permanent Fix)

If the MoF's UST selling is large and structural, a temporary repo bandage isn't enough. The cash drain from the US commercial banking system becomes permanent. To fix this structural deficit in bank reserves, the Fed must execute Open Market Operations (OMOs): 

• The Mechanics: The Fed permanently buys USTs (often short-duration bills or coupons) directly from the market.
• The Accounting: The Fed credits the primary dealers' accounts with newly created central bank reserves (M₀ in the US). 

However, given that lending and inflation is ALREADY red hot in Japan, it might not be advisable to give them more boost. 

The BoJ has to do QT to curb the Japanese banks’ enthusiasm.

On the other hand, the BoJ has deliberately expanded its monetary base more than historically required.

What we have is a textbook monetary policy regime shift where the plumbing completely turns on its head. 

For nearly a decade, the BoJ ran an unprecedentedly loose M₀ expansion (via Quantitative Easing and Yield Curve Control) with the explicit, deliberate intent to debase the Yen, flush the commercial banks with excess domestic liquidity, and force inflation back into a stagnant economy.

Now, that mission is not just accomplished—it is burning too hot. Inflation is back, bank credit creation is moving fast, and the MoF's balance-sheet maneuvers are acting as an accidental turbocharger. The BoJ is now forced into a massive offsetting operation. 

The New Loop: From Debasement to Sterilization

When we overlay this reality onto in the 4-step M₀ loop, we can see exactly why the BoJ’s current QT program isn't just a standard policy tightening. It is to absorb the secondary domestic fallout of the MoF's dollar operations.

Recall the domestic round-trip we mapped out:

[The MoF Spending Pipeline]

MoF ──► M0 ──► Japanese Bondholders ──► M0 ──► Commercial Banks ──► M0 ──► BoJ

Under the old "devaluation" regime, the BoJ wanted that M₀ to sit in the commercial banks forever so they would lend it out domestically and create inflation. But today, because bank lending and inflation are already red hot, that sudden wave of M₀ returning to the banks in Step 4 is highly toxic.

If left unmanaged, the commercial banks will use those newly restored domestic deposits and reserves to expand their domestic loan books even faster, adding massive fuel to the inflationary fire.

How the BoJ's QT Acts as the Vital Safety Valve

To prevent this domestic credit explosion, the BoJ cannot just let those reserves sit passively in the banks' current accounts. They must sterilize and neutralize that liquidity. This is exactly where the BoJ's aggressive Quantitative Tightening (QT) and JGB tapering come into play:

By aggressively rolling back its balance sheet, the BoJ is actively pulling that high-powered M₀ out of the private banking system. They are forcing the commercial banks to swap their liquid cash reserves for JGBs, locking up their domestic lending capacity.

The Ultimate Irony of Japan's Macro Plumbing

When you step back and look at the unified picture, the institutional irony is spectacular:

1. The MoF executes an operation that accidentally lowers the global funding costs for Japanese banks and hands them immense operational freedom to expand lending.
2. The Domestic Economy reacts to years of debasement, sending inflation and bank credit into overdrive.
3. The BoJ is left playing defense. They must run aggressive QT to mop up the domestic Yen liquidity loop, to cool down the very domestic credit machine they spent ten years trying to start.

It is no longer a game of currency devaluation; it is a game of containment. The BoJ is running QT because the domestic plumbing has successfully turned the corner from deflationary stagnation to an inflationary boom, and every round-trip of government cash threatens to spill over into an already overheated economy.

The Four Pillars Crushing the Yen Short Thesis

The mechanics isolated have systematically dismantled the pillars that the global macro community used to fund the Yen carry trade:

1. The Yield Barrier: The BoJ's Forced QT 

The Yen short was fundamentally a yield-differential play. Traders borrowed Yen at 0% to buy higher-yielding global assets. But with domestic inflation and bank lending running red-hot, the BoJ is structurally forced to run QT and raise rates to neutralize that M₀ round-trip. The era of free, infinite Yen funding is over. 

2. The Internalization of Dollars

As we mapped out, the MoF's actions successfully bypassed the open FX swap market, shifting unencumbered USD cash directly onto the left side of Japanese bank balance sheets.

• By using this cash to extinguish right-side swap liabilities, Japanese banks have significantly reduced their need to aggressively bid for dollars or dump Yen on the global stage.
• The structural, desperate downward pressure on the Yen from Japanese institutional funding needs has evaporated. 

3. The Fed Is the New Sponge

The global loop proves that the US interbank system cannot handle the collateral load without collapsing. With the Fed forced to step in with permanent "reserves management" (buying back the USTs the MoF unloads), the US dollar is the currency facing structural expansion and liquidity management hurdles, not the Yen. 

4. From Devaluation to Domestic Sterilization

The BoJ's operational goal has completely flipped. They are no longer actively trying to destroy the purchasing power of the Yen to spark inflation. They are now in active containment mode—using aggressive balance sheet tapering to freeze domestic lending and defend the domestic economy from overheating. 

The Reality Shift

[The Structural Shift in JPY Plumbing] 

OLD REGIME (Yen Short): Infinite M₀ Expansion ──► Debasement ──► Capital Flight NEW REGIME (Yen Long): Hot Credit/Inflation ──► Forced QT ──► Internal Capital Recycling

The macro market is notorious for being late to realize when the plumbing changes. For a long time, algorithmic and trend-following traders chased the Carrollian "failed intervention" rabbit, thinking the MoF was losing a currency war.

But as the step-by-step balance sheet analysis shows, Japan wasn't failing; they were quietly re-engineering their entire banking architecture. They insulated their commercial banks, offloaded long-duration risk onto the Fed, and transitioned their domestic policy from reckless debasement to structural tightening. The plumbing has cleared, the loop is closed, and the structural Yen short has run completely out of rope.

Coming back to the M0 expansion 

Well if you were planning to do a competitive devaluation to shrink the value of the debt in real terms (vs Gold while FX stays aggressively competitive vs the Chinese Yuan)  reduce the Gov debt to GDP on a relative basis and boost the nominal amount of tax revenues to spending, well you would do exactly that, doing a covert beggar thy neighbor while the BoJ feign not to know what they are doing.

Diluting the currency with excess M0 does exactly that. Duh A deval. Duh. But now that the conditions of those accounts are getting better;  

Well time to mop-up a bit of that excess M0 especially if the MoF action boost too much the Banks. 

Future analysis will address the impact of healthcare spending per capita alongside tax policy adjustments.

We will also have to come back to the issue of trade and especially on the energy front since Japan exports goods and imports energy, and talk about the primary deficit as well. 

That will be the next post.