Along with most monetary enthusiasts I was anticipating a significant announcement from the BOJ two day policy meeting this week, and this seems to be it. They are going with an aggressive set of both qualitative and quantitative easing with the express intention of weakening the Yen and creating monetary inflation.
Japan will be firing up their industrial policy using the weaker yen to create more foreign demand for their goods to make up for the slack domestic demand based on their declining demographics.
As you may recall, Japan has been unable to stimulate their economy despite spending rather significant sums on infrastructure and other stimulus projects. The lack of reform in their fairly well entrenched and pervasive crony capitalist keiretsu structure, which one might say is about a half step removed from outright feudalism, has resisted all their best attempts at livening things up.
And the declining demographics of an island nation that discourages immigration is certainly no help either. But I would not discount the tax that corruption and inefficiency plays in dampening GDP growth, post bubble. Corruption creates inefficiency, fraud, and malinvestment, always and everywhere. Just ask China.
This major policy shift to inflation may help to explain the relentless hammering of the precious metals, which are the only rival currencies that cannot be doubled by the stroke of a bureaucrat's keyboard.
Look for more competitive devaluations from other countries, both explicit and implicit. This is the more conventional aspect of the currency war, and is a perennial favorite of the political class.
The more secular aspect is the seismic shift of the US dollar reserve currency regime which has been in place since the end of WW II. That bit of monetary exotica will make this currency war one to remember.
DailyFX
Yen Weakens as BoJ Introduces Qualitative and Quantitative Easing
By Christopher Almeida
04 April 2013 05:10 GMT
THE TAKEAWAY: The Yen weakened as the Bank of Japan introduced Qualitative and Quantitative Monetary Easing including an increase of JGB purchases.
At the end of the two day meeting, the Bank of Japan announced that they were introducing a ‘Quantitative and Qualitative Monetary Easing’ program with an aim to achieve the price stability target of 2 per cent in two years. The Bank announced that it will now use ‘monetary base control’ in pursuing quantitative monetary easing which involves carrying out market operations that will expand the monetary base by 60-70 trillion Yen per year.
The Bank will also increase Japanese Government Bond purchases as well as increasing the average remaining maturity of about 3 years to 7 years. As a result of these, the Japanese Central Bank has decided to terminate the Asset Purchase Program with the outstanding purchases being absorbed into the JGB program.
In their statement, the policy makers stated that Japan’s economy was showing signs of a pickup with overseas economies seen to be growing at moderate paces. Despite the year on year rate of change of the CPI for Japan being negative recently, the Bank sees that indicators are suggesting a rise in inflation expectations...
Rest of the article with Yen Chart here.
Financial Times
Bank of Japan to double monetary base
By Ben McLannahan in Japan
April 4, 2013 6:05 am
Haruhiko Kuroda has announced his arrival as governor of the Bank of Japan by introducing a “new phase of monetary easing”, doubling Japan’s monetary base through aggressive purchases of long-term government bonds and risk assets.
Read the entire article here.
