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Central Bank Idiocy: The BOJ Goes All In as Fed Takes a Breather


If first you don’t succeed, keep trying until you destroy the nation.

Christopher-LemieuxSMBullion.Directory precious metals analysis 31 October, 2014
By Christopher Lemieux

Senior FX and Commodities Analyst at FX Analytics

The dollar is higher. The commodities complex is sinking into the abyss with gold at a new four-year low, and the Japanese yen price action fell off my chart (literally). All thanks to the idiocy of the Bank of Japan (BoJ). Abeconomics is on the verge of becoming a failure, and Prime Minister Shinzo Abe, along with BoJ Governor Haruhiko Kuroda,  go all in just as the Fed took a breather.

Just as the Federal Reserve finished tapering their quantitative easing program for the third time in less than a decade, the BoJ surprised the markets with a stimulus bomb: the central bank looks to pushing bond purchases from ¥8 trillion to ¥12 trillion per month, or $108 billion ($22 billion more than the Fed conducted in their latest round at the peak). This means that the BoJ will purchase all of the bond issuance each month by the Ministry of Finance. The BoJ will also triple its ETF purchases to ¥3 trillion and REITs to ¥90 billion from ¥30 billion. The BoJ will likely indulge on ETFs that track the Nikkei, too. Traders loved the sweet central banking hymns with the Nikkei hitting a session limit of 1,100 points. The dollar gained over a percent as the yen deteriorated (of my chart, no less). USDJPY now stands near 112.

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Kuroda looks to further expand the monetary base, while inflation is still not near the price stability of two percent – and Goldman Sachs, once an Abeconomics lover, forecasts that the BoJ has its hands full with uncertainty. According to Goldman’s Naohiko Baba, “we believe the BoJ is treading a very narrow path.”

The central bank is already the largest single holder of Japan’s bonds, and the scale of its buying could fuel concerns it is underwriting deficits of a nation with the heaviest debt burden. The BoJ could end up owning half of the JGB market by as early as in 2008…. the BoJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation.

Takuji Okubo, chief economist at Japan Macro Advisors

Japan’s debt-to-GDP is over 240 percent, making it the world’s largest debtor.

The kicker: Kuroda said he sees no difficulty in exiting when needed.

When will the financial markets wake up to this central bank fallacy? Who knows. However, when the dream subsides the ending will be epic.

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