I don’t think it’s an overstatement to say that the Bank of Japan (BOJ) is apparently reaching the limits of what it “reasonably” can do in the context of further easing of its monetary policy now that BOJ already holds more than one third of the outstanding Japanese Government Bonds (JGB) and the introduction of a negative interest rate in February clearly didn’t result in a lower Japanese yen (JPY) or caused signs that inflation is coming back.
Interestingly, BOJ Governor Kuroda promised that the bank would take additional easing steps if necessary (?) to achieve its price target, as there was still space to move further into negative territory with rates as well as to expand QE further. It remains more than questionable if the BOJ will be able to strengthen its credibility and when you take a quick look at the Central bank’s balance sheet versus inflation expectations you don't have to be a banker to see that it will be practically impossible task to achieve that over the short to median future.
Long-term investors should pay attention at what happens in Japan, which is the world’s third economy and what goes wrong over there will affect everybody everywhere.
The Pandora's box is what will the Japanese do to weaken the Japanese yen (JPY).
Please keep in mind that during the past 25 years the yen has strengthened from JPY 125 per dollar to JPY 100 per dollar on five occasions. The first of these moves came during the first months of 1995 after the intervention of the BOJ remained unsuccessful while the second move down of the yen against the dollar (down = strength) in various stages started in 1998 and reached its climax in 2011 when the yen reached 75.77 per dollar.
History shows us that 100 yen per dollar is probably the “line in the sand” that will be defended.
The question that immediately comes up is how and with what measures are the Bank of Japan and the Japanese authorities going to defend that 100 yen mark, and if they do it how will the other important central banks react to their measures.
The risk is real that we are closing in on a full blown currency war that could turn the already weak world economy on its head and curtail further growth and consequently employment.
Besides all that, the just released unemployment figure for the Euro area remained unchanged at 10.1 percent in June. Youth unemployment remained at 47.4 percent in Greece and 45.8 percent in Spain. The U.S. unemployment rate was 4.9 percent in June.
Maybe it could be interesting to pay attention what Sergio Ermotti, CEO of UBS just said when commenting the results of the bank that came in better than expected, but also saying the UBS world wealth management division showed their wealthy clients are 28 percent in cash and for the Americas that’s 25 percent, which is extremely high and certainly doesn’t help the bank’s business.
Not that long ago and in context of the huge amounts wealthy investors hold in cash, the chair of UBS Americas division Bob McCann said individuals’ definition of risk has now changed to “How much money can I afford to lose permanently.”
Yes, food for thought.
Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.
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