Bank of Japan to Pursue Qualitative and Quantitative Easing - Double Their Monetary Base

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.

Just when I thought I was out... they pull me BACK IN!

Silver Open Interest just ballooned from 142,520 yesterday to 147,465 today.

The all important March 2011 silver contract, which should be rolling over to future months,
actually GAINED from 61,237 to 61,720 contracts today.

Asians Buying SLV to Take Possession of Silver Bullion

As an aside, there may be a hedge fund 'raid' on the Yen or Gold coming. Or perhaps word of official action has leaked. I am not sure what a 'watershed event' implies here.
"In an important development, The Gartman Letter – which not only has an excellent nose for major currency trends but which is also very well informed – declared a “Watershed” event for the yen, and increased its yen short positions, including adding another yen/gold “unit”. "

Gold Rises to Record Prices Against European and Asian Currencies

The current global crisis is a direct result of the long Greenspan chairmanship of the Fed, neo-liberal deregulation of the financial markets, and rampant fraud and corruption amongst the financiers controlling the world's reserve currency, from the bankers to the ratings agencies to the regulatory bodies.

"Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood. For these few gold has been the asset of last resort." Antony C. Sutton

UK Telegraph
Gold hits record against euro on fear of Zimbabwean-style response to bank crisis
By Ambrose Evans-Pritchard
8:49PM GMT 17 Feb 2009

This gold rally is driven by safe-haven fears and has a very different feel from the bull market we've had for the last eight years," said John Reade, chief metals strategist at UBS. "Investors are seeing articles in the press saying governments should deliberately stoke inflation, and they are reacting to it."

Gold jumped to multiple records on Tuesday, triggered by fears that East Europe's banking crisis could set off debt defaults and lead to contagion within the eurozone. It touched €762 an ounce against the euro, £675 against sterling, and 47,783 against India's rupee.

Jewellery demand – usually the mainstay of the industry – has almost entirely dried up and the price is now being driven by investors. They range from the billionaires stashing boxes of krugerrands under the floors of their Swiss chalets (as an emergency fund for total disorder) to the small savers buying the exchange traded funds (ETFs). SPDR Gold Trust has added 200 metric tonnes in the last six weeks. ETF Securities added 62,000 ounces last week alone.

In dollar terms, gold is at a seven-month high of $964. This is below last spring's peak of $1,030 but the circumstances today are radically different. The dollar itself has become a safe haven as the crisis goes from bad to worse – if only because it is the currency of a unified and powerful nation with institutions that have been tested over time. It is not yet clear how well the eurozone's 16-strong bloc of disparate states will respond to extreme stress. The euro dived two cents to $1.26 against the dollar, threatening to break below a 24-year upward trend line.

Crucially, gold has decoupled from oil and base metals, finding once again its ancient role as a store of wealth in dangerous times.

"People can see that the only solution to the credit crisis is to devalue all fiat currencies," said Peter Hambro, chairman of the Anglo-Russian mining group Peter Hambro Gold. "The job of central bankers is to allow this to happen in an orderly fashion through inflation. I'm afraid it is the only way to avoid disaster, but naturally investors are turning to gold as a form of wealth insurance."

One analyst said the spectacle of central banks slashing rates to zero across the world and buying government debt as if there was no tomorrow feels like the "beginning of the 'Zimbabwe-isation' of the global economy".

Gold bugs have been emboldened by news that Russia has accumulated 90 tonnes over the last 15 months.

"We are buying gold," said Alexei Ulyukayev, deputy head of Russia's central bank. The bank is under orders from the Kremlin to raise the gold share of foreign reserves to 10pc.

The trend by central banks and global wealth funds to shift reserves into euro bonds may have peaked as it becomes clear that the European region is tipping into a slump that is as deep – if not deeper – than the US downturn. Germany contracted at an 8.4pc annual rate in the fourth quarter. The severity of the crash in Britain, Ireland, Spain, the Baltics, Hungary, Ukraine and Russia has shifted the epicentre of this crisis across the Atlantic. The latest shock news is the 20pc fall in Russia's industrial production in January. The country is losing half a million jobs a month.

Markets have been rattled this week by warnings from rating agency Moody's that Austrian, Swedish and Italian banks may face downgrades over their heavy exposure to the ex-Soviet bloc. The region has borrowed $1.7 trillion (£1.2 trillion) – mostly from European banks – and must roll over $400bn this year....

Euro/Yen and the US Equity Markets Bubble: A Monetary Phenomenon

Here is an interesting comparison which we believe has some validity in that the credit and asset bubble
was significantly a Yen and Dollar, and possibly a Renminbi, monetary phenomenon.

The broadly manipulated currency markets in a fiat regime are the tail wagging the dog of the world economy.

The ultimate question might be who, if anyone, is doing the wagging?

Just to keep it interesting, and to drive home the point that these relationships are rarely simple and straightforward,
this chart shows the sharp decline in the euro/dollar cross with the decline of US financial assets.
We think we have previously shown a tight correlation between US asset values held by European banks and the eurodollar.
There may also be some 'flight to home currency' phenomenon amongst US investors.

How Important Is the Yen Carry Trade?

Fairly significant, at least for US equity markets.

We show the relationship of the SP 500 in our Yen chart every night.
But we like this format from our friends at The ContraryInvestor.com
who are true masters of the pictorial display.

This does not imply cause and effect per se. As equities decline, the trade goes off, and as equities rally the trade is on.

Is this use of international currency exchange rates arbitrage the types of thing that one had in mind when discussing competitive advantage and global trade?

Did Michael Porter fail to consider the sheer amount of gambling that can overtake markets?

Are the currency market relationships reflecting international trade balances, soundness of national economics, and relative returns based on ... Forex Roulette?

As you may recall in the short term markets given over to speculation may have little or no relationship to fundamentals, which assert themselves in the long term trends.

In the short run, the market is a voting machine but in the long run it is a weighing machine.

This is how equity markets can shake themselves apart. We had always looked to the bond and currency markets as better and more stable indicators of values. Certainly with large short term moves, but always showing more sense when the equity market punters were frothing.

Those trying to conduct productive business with 'real things' in this environment must feel like they are trying to play a game of chess on a roller coaster.

We appear to be in times of general speculation, with wide reversions to the means creating resonances that might shake the world. These are the types of markets that give rise to new powers and great fortunes, test the fabric of relationships, and bring down old institutions.

Is the tail wagging the dog? Again? It appears to be.