Japan’s absurd 0.2% rate cut is offering American “Dollar Shorts” a second chance at doubling their money.

Welcome to the World Banking Limbo competition, wherein central bankers around the world try to calculate that fine line between a stimulated economy and a destroyed currency.

Last Tuesday, U.S. Fed Chairman “Helicopter Ben” Bernanke re-earned that moniker when he announced that the U.S. central bank would move rates below 1% for the first time in history. What’s more, he promised that if that didn’t work, he would just have to imagineer trillions of new dollars to buy up U.S. Treasury notes.

Currency traders reacted almost instantly, ditching dollars for euros and yen as fast as the market would allow. Suddenly, the dollar was trading at a 13-year low to the yen and damn near par with the euro’s launch price back in 2002.

Gold bugs were also driven into a frenzy, and over the next day or so, futures for the stuff popped up some 5.42%.

The Race for the Bottom

Problem is, this whole “recession thing” is an international phenomenon. So when the dollar drops, stuff overseas gets a good bit more expensive for American consumers.

Now, let’s say you work in the corner office at Toyota’s headquarters. It’s been hard enough selling into the US market, what with American consumers all down in the dumps. Last thing in the world you want to hear is that your uphill climb selling into our market just got a good bit steeper.

Think Japanese sports cars are fast? The hand that dialed the phone between Toyota and the Bank of Japan was a heck of a lot faster.

By Friday, the BOJ announced that it, too, would cut rates. So there, Mister fancy pants Fed Chairman!

How Low Can They Go?

“Wait a minute,” you might very well ask. “Haven’t BOJ interbank rates already been sub 1% for ages now?” You betcha! In fact, before the BOJ acted, they were already down to 0.3%.

So how low can they go now? The new BOJ rate is a whopping 0.1%. That’s right: one tenth of one percent. Oh, and Governor Masaaki Shirakawa and his board cohorts also claim that they, too, will create new yen with which they can buy up corporate and financial sector debt.

Some of the folks who watch these gyrations for a living have described the new mood in Tokyo as “aggressive.” Others have described it as “desperate.”

One thing I can tell you: They will hit dead zero before we do. I don’t know if that’s anything to be proud of... In the short run (we are talking a day or two), this has driven the dollar back up off its knees.

The Yen Will “Win” in the End

I have to figure that Japan will lose this limbo contest in the end. There are simply too many Japanese housewives banking yen every chance they get... whereas our government has told us outright that we simply must begin shopping again as soon as possible, and it is quite willing to put all of “its” (and by that I mean “your”) dollars behind that notion.

To my mind, this is a buying opportunity for the various short dollar/long gold positions I have mentioned recently, including shares of PowerShares DB US Dollar Index Bearish (NYSEArca: UDN) and SPDR Gold Shares (NYSEArca: GLD).

Either position stands to gain some 20%-30% over the next few months. Traders who are looking for additional leverage (or a shorter time span) should consider at-the-money mid-term call options. Properly done, these options could easily triple your gains on these ETFs.

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