LIVE Gold Prices $  | E-Mail Subscriptions | Update GoldSeek | GoldSeek Radio 

Commentary : Gold Review : Markets : News Wire : Quotes : Silver : Stocks - Main Page 

 GoldSeek.com >> News >> Story  Disclaimer 
 
Latest Headlines

GoldSeek.com to Launch New Website
By: GoldSeek.com

Is Gold Price Action Warning Of Imminent Monetary Collapse Part 2?
By: Hubert Moolman

Gold and Silver Are Just Getting Started
By: Frank Holmes, US Funds

Silver Makes High Wave Candle at Target – Here’s What to Expect…
By: Clive Maund

Gold Blows Through Upside Resistance - The Chase Is On
By: Avi Gilburt

U.S. Mint To Reduce Gold & Silver Eagle Production Over The Next 12-18 Months
By: Steve St. Angelo, SRSrocco Report

Gold's sharp rise throws Financial Times into an erroneous sulk
By: Chris Powell, GATA

Precious Metals Update Video: Gold's unusual strength
By: Ira Epstein

Asian Metals Market Update: July-29-2020
By: Chintan Karnani, Insignia Consultants

Gold's rise is a 'mystery' because journalism always fails to pursue it
By: Chris Powell, GATA

 
Search

GoldSeek Web

 
Japan: Monetary Madness in Times of Unsustainable Deficits?



By: Axel G. Merk, Merk Investments


-- Posted Tuesday, 2 April 2013 | | Disqus

Unsustainable debt. Depression-era fiscal policy. Monetary madness. Welcome to Japan. You may not live or invest in Japan, but your investments may well be affected by what is unfolding in the Land of the Rising Sun. Be prepared.

Japan’s government has vowed to end deflation by pursuing both depression-era fiscal policy and aggressive monetary policy. We recently analyzed implications of Japan’s planned fiscal policies for the yen (see “How Low Will the Yen Go: Depression-Era Policies”). Since then, Bank of Japan’s (BOJ) new governor Haruhiko Kuroda has warned Japan’s debt is not sustainable. Indeed, the only reason why Japan’s debt has been sustainable may be because deficits have historically been financed domestically. However, Japan’s current account balance has been deteriorating: in our assessment, dynamics will be radically different once foreigners are expected to help finance the budget deficit. Already we can see that the yen no longer fulfills the role as a safe haven; that is, whereas the yen was a great beneficiary of the “flight to safety” in 2008, the currency’s status has been eroding in tandem with the country’s current account balance (for more on the yen as a safe haven, see our analysis “Is the Yen Doomed?”)

As domestic investors may not be able to support the country’s deficit any further, and international investors may be unwilling to, the BOJ could step in and buy bonds to help finance the deficit. The valve then, in our assessment, has to be the currency. As the debt is monetized, there could be grave consequences for the yen.

While the yen has weakened of late, we may not have seen anything yet. That’s because unlike the BOJ’s reputation, the central bank there has actually been rather modest in its “quantitative easing” programs in recent years. Here is a chart comparing the amount of money select central banks have been “printing” (the colloquial term for monetary easing, even if no banknotes are physically printed):

 

Even the open-ended asset purchase program recently announced by the outgoing BOJ governor is modest in comparison to the program of the Federal Reserve (Fed). The BOJ’s program to buy more than $1 trillion1 a year worth of assets is stated on a gross basis, rather than a net basis. Removing reinvestment of maturing securities from the gross amount announced, the net purchases end up being relatively tame2. At the Fed, in contrast, assets are currently being bought at a net rate of approximately $1 trillion a year, reinvestment of maturing securities is left out of the stated size of the program.

That’s the past. There’s a new leadership at the BOJ; a new governor and two deputies have been installed by Prime Minister Abe’s government. The first meeting of the new team is Wednesday and Thursday this week. BOJ’s new governor Haruhiko Kuroda has made it clear he wants Japan to have 2% inflation within two years. One of his deputies has since come out and suggested that this goal might be over-ambitious. But monetary policy is as much about perception as it is about reality: if the market believes a 2% inflation target is achievable, if consumers believe 2% inflation might come, it might become a self-fulfilling prophecy. Trouble is, we do not see how it is possible for the government to finance the debt and ongoing deficits should government bond yields reflect a 2% inflation premium. And because the government might not be able to finance the debt and deficits, the BOJ may step in to do so, very much accepting, possibly even fostering, the negative feedback loop that might ensue for the yen.

With a greater unity within the top leadership and strong support from the Japanese government, there is not much to hold the new BOJ back from unleashing its printing press. To put into context the rather dramatic overhaul at the top of the Bank of Japan, consider the profiles of the retired and new leadership:

 

What does the new governor Kuroda have in his toolbox? He has long been floating three ideas for Japan’s monetary policy: 1) an ambitious inflation target; 2) an explicit time framework to achieve the inflation target; and 3) a focus on buying long-term Japanese government bonds (JGBs) to boost the monetary base.

Unlike the Fed who pays most attention to core inflation that excludes both food and energy, the BOJ’s inflation target is currently focused on a CPI measure that excludes fresh food but includes energy costs. Note that Japan is one of the world’s most energy-import dependent countries. Fuel imports accounted for roughly a third of Japan’s import bills in 2012. With the shutdown of nuclear power plants, the demand for energy imports, especially LNG, will continue to rise, and energy prices will increasingly weigh on import prices. That means, the CPI measure closely watched by the BOJ that contains an energy price portion will be increasingly associated with the yen exchange rate. In other words, by targeting a CPI measure including energy costs that are largely affected by the exchange rate, the BOJ is implicitly targeting the yen. Kuroda has also made it clear that, going forward, he does not intend to target the core inflation that excludes food and energy. Therefore, a weaker yen will naturally be in the BOJ’s interest in achieving its ambitious inflation target.

The yen has depreciated more than 17% versus the U.S. dollar in the past six months ending March 31, 2013; Japanese stocks have rallied, with the Japanese government bond (JGB) market recently joining the party. Yields on long JGB maturities fell to their lowest levels in a decade, in response to Kuroda’s calling for incorporating long-term JGBs in the QE program. Under the current Asset Purchase Program since 2010, the BOJ can only purchase short-term JGBs with a remaining maturity up to 3 years. The central bank also purchases and holds long-term JGBs, but only through regular market operations separated from the Asset Purchase Program. In addition, under the existing plan, the 2014 open-ended QE will be heavily concentrated on Japanese Treasury bills, with an anticipated monthly purchase of 10 trillion yen, compared to 2 trillion yen of JGBs per month.

Kuroda’s idea of buying long-term JGBs is not new to the BOJ. The central bank had a half-hearted quantitative easing during 2001-2006, under which it bought long-term Japanese government bonds (JGBs). But it took five years for the BOJ to turn the CPI (excluding fresh food) growth rate positive. Below find the BOJ’s balance sheet size and Japan’s CPI (excluding fresh food) change during two QE periods.

 

Kuroda does not seem to want to wait for five years. Kuroda’s aim appears to be to achieve the 2% inflation target in two stages: 1% inflation within the first year, and 2% within in the following year. We expect the BOJ under his leadership to aggressively pursue "innovative, non-traditional anti-deflationary policies" that he has advocated for more than a decade, including:

  • Pulling forward the open-ended asset purchase program, currently scheduled to start in January 2014
  • Beginning outright purchases of longer-dated JGBs in the asset purchase program, or consolidating regular market operations with the asset purchase program
  • The purchase of other “risky” (non-government) assets.
  • Enhanced attempts to convince the markets through words of the BOJ’s determination to achieve its target

In fact, some of the abovementioned measures had already been discussed in the BOJ’s February 13-14 meeting, when retired governor Shirakawa was still in office. With new leadership in place, we expect the Kuroda-led BOJ to act swiftly.

Some point out that Japanese inflation expectations already picked up, reflected by the higher spreads between nominal yields and yields on inflation protected securities. But this measure is not very reliable in Japan, as Japan hasn't issued inflation-indexed bonds since Oct 2008 and the market lacks liquidity. Having said that, in the monthly households survey conducted by the Japanese Cabinet Office, the share of respondents that expected prices to go higher increased to 70% in February. However, actual consumer inflation measured by CPI ex fresh food year-on-year growth has not made it above zero.

 

BOJ governor Kuroda will unveil which tools from his toolbox he may deploy. We refer to it as monetary madness because we don’t see how this can have a good ending for Japan, the yen, or the world. Japan has a $6 trillion economy, more than 200 times that of Cyprus. Should the market express its discomfort with Japan’s policies, there will be ripple effects to global markets. For now, the most direct implication is that we are rather negative on the yen. But don’t kid yourself: there may not be a place to hide, there may not be such a thing anymore as a safe asset. We have long argued that investors may want to take a diversified approach to something as mundane as cash. Conversely, there may be opportunities: just as our central bankers have their toolbox, you may want to check the tools deployed in your portfolio. To learn more about the tools we encourage investors to consider, please register for our Webinar on Thursday, April 18, 2013. Also, make sure to sign up for our newsletter as we help make sense of global dynamics and their implications for gold and currencies.

Axel Merk

Axel Merk is President and Chief Investment Officer, Merk Investments, Manager of the Merk Funds.

Yuan Fang

Yuan Fang is a Financial Analyst at Merk Investments and member of the portfolio management group.

113 trillion yen per month (or 156 trillion yen per year, equivalent to US$1.66 trillion if using an exchange rate of 94.22 yen per dollar as of Mar. 29, 2013)
2 According to the BOJ: Based on the average residual maturities of JGBs and T-Bills that have recently been purchased (by the BOJ), the total size of the Asset Purchase Program, through the above-mentioned monthly purchases, will be increased by about 10 trillion yen in 2014


-- Posted Tuesday, 2 April 2013 | Digg This Article | Source: GoldSeek.com

comments powered by Disqus

Axel Merk Axel Merk is Manager of the Merk Hard Currency Fund

The Merk Hard Currency Fund is a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the U.S. dollar relative to other currencies. The Fund may serve as a valuable diversification component as it seeks to protect against a decline in the dollar while potentially mitigating stock market, credit and interest risks—with the ease of investing in a mutual fund.
The Fund may be appropriate for you if you are pursuing a long-term goal with a hard currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Fund and to download a prospectus, please visit www.merkfund.com.
Investors should consider the investment objectives, risks and charges and expenses of the Merk Hard Currency Fund carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Fund's website at www.merkfund.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.
The Fund primarily invests in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Fund owns and the price of the Fund’s shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Fund is subject to interest rate risk which is the risk that debt securities in the Fund’s portfolio will decline in value because of increases in market interest rates. As a non-diversified fund, the Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. The Fund may also invest in derivative securities which can be volatile and involve various types and degrees of risk. For a more complete discussion of these and other Fund risks please refer to the Fund’s prospectus. Foreside Fund Services, LLC, distributor.




 



Increase Text SizeDecrease Text SizeE-mail Link of Current PagePrinter Friendly PageReturn to GoldSeek.com

 news.goldseek.com >> Story

E-mail Page  | Print  | Disclaimer 


© 1995 - 2019



GoldSeek.com Supports Kiva.org

© GoldSeek.com, Gold Seek LLC

The content on this site is protected by U.S. and international copyright laws and is the property of GoldSeek.com and/or the providers of the content under license. By "content" we mean any information, mode of expression, or other materials and services found on GoldSeek.com. This includes editorials, news, our writings, graphics, and any and all other features found on the site. Please contact us for any further information.

Live GoldSeek Visitor Map | Disclaimer


Map

The views contained here may not represent the views of GoldSeek.com, Gold Seek LLC, its affiliates or advertisers. GoldSeek.com, Gold Seek LLC makes no representation, warranty or guarantee as to the accuracy or completeness of the information (including news, editorials, prices, statistics, analyses and the like) provided through its service. Any copying, reproduction and/or redistribution of any of the documents, data, content or materials contained on or within this website, without the express written consent of GoldSeek.com, Gold Seek LLC, is strictly prohibited. In no event shall GoldSeek.com, Gold Seek LLC or its affiliates be liable to any person for any decision made or action taken in reliance upon the information provided herein.