The baby boomers do expect ever so much from their children, cut off their job prospects and earning power and then some how expect that they will be able to afford the tax burden of their retirement, the pension and the health care…

I would actually argue that in Japan’s case it’s a separate effect, and not part of the recycling of the trade deficit, at least in part. True, the BOJ keeps rates low partially to make it unattractive to buy and hold yen (hence making it more difficult for Japanese exporters, and stimulating their GDP as a result). However, I would argue that this effect, and policy motivation, is separate from the recycling of trade flows. Even if the US trade deficit were lower, and USD/JPY traded stronger, I would suspect that the BOJ would keep rates relatively low compared to other G10 rates (although perhaps slightly higher from these levels) in order to stimulate the domestic (non-export oriented) economy of Japan.

As for Japanese retail investor flows, given the pressing demographic needs of Japanese society, I expect that they will continue to diversify into a variety of foreign investments unless and until the BOJ raises rates substantially, which seems highly unlikely at present. The global stretch for yield that you mentioned as Piller 5 is very real.

P.S. – As for today’s market, do you still have that Wayback Machine from a previous posting? I wouldn’t mind going back to yesterday and putting on a few hedges….

You’re right, I omitted those, and that is a partial oversight. Partial, because the carry trades as they affect the US are part of number 3. Globally, they are a separate effect, because you can look at how NZ is getting flooded with demand for its debt, pushing the currency up more and more.

So far we have not seen any large liquidation of the carry trade. We still have Japanese investors trying to make money off of higher interest rates abroad. But perhaps they will be the last to know?

You omitted the various carry trades, usually funded mainly via yen, less so via Swiss francs or other low yielders (as distinct from the current account deficit recycling or Japanese retail investor diversification into high yielders). As far as I can tell, that trade is still extant, although the yen has been strengthening a little lately. David Rosenberg of Merrill had an interesting observation yesterday in that recently the yen has been a prime beneficiary of any flight-to-quality, as risky assets are liquidated and short yen positions covered. I believe that is the logic behind your previously disclosed long yen position. Just my two cents…worth about two yen now too…