Nervous Japan pulled the trigger of the nuclear currency war
While North Korea is issuing fictional nuclear threats and USA is relocating some troops in answer, the real nuclear explosion came on financial markets with the sudden decision of BoJ to double the government bond purchases. This is may be the biggest one-time change in the ongoing global currency war. That’s why it may be called an “atomic” bomb. Generally the sum of the rest explosions on the market is bigger as effect and size that this move. But as a one-time change this is simply a super-bomb.
It looks as Japan central bankers have lost their nerves. After months of verbal interventions from the world central bankers, Japan is the first to pull the trigger. It is not clear if this will be an advantage or disadvantage.
After the new change BoJ will buy government debt valued $74 billion dollars every month. This is very close to the level of $85 billion purchases by FED in USA. But the economy of Japan is 3 times smaller than the US one. So relatively this is much more aggressive intervention. In addition it must be remembered that the dollar is still a global currency, so printing dollars affects the entire world and makes the hit for the US economy weaker. The Yen is not so powerful global currency and the money print influences mostly the Japan itself.
In long term BoJ has no choice than to print Yens and buy the debt. Japan has a record government debt of 230% of its GDP. Even at 2-2,5% interest rates artificially kept at this level, it must spend about 5% of its GDP only on interest payments. This is about 11% of the government budget only on interest payments. And this share is rising. In addition with so much debt on the market simply there is no one to buy it, if BoJ decides to stay away. Japan is simply in a debt spiral.
So without the BoJ interventions Japan will simply go bankrupt. So strategically there is no other choice than to intervene. But the rapid way of last intervention, and literally exploding the markets with it, shows symptoms of panic and not a very logical system of producing decisions.
The currency war as a philosophy was formally rejected by all the leading global economies. Anyway it was a hard decision to close eyes in front of upcoming with the new Japan government public promise for weakening the Yen and stimulating the economy this way. On the last meeting of G-20 this theme was hardly suppressed and Japan avoided a public censure. But now with this move exceeding all expectations, the rage of the rest big players can escalate.
Most of the leading economies are in crisis now and most of them are looking for more export for reviving. And most of them stupidly are finding the currency devaluation as the right policy. But as we can guess – it is simply impossible all currencies to devalue against the rest in one and the same time. I.e. it is impossible all countries to get a currency advantage simultaneously.
This simply means that soon after this nuclear financial attack there will be a reaction. To be effective this reaction will have to be with the same power. I.e. it will have to be also of nuclear scale. So it is logical to assume that next QEs, LTROs and interest go-down moves will be bigger that the previous ones. Sometimes I am thinking if someone will one day “discover” the “genius” weapon of negative interest rates. I acknowledge this will be already a Death Star planet destructor shot… Smile… :)))
But seriously talking, the BoJ shot simply has brought the currency war to a new level.
This scenario was absolutely predictable. Every money print is obliged to escalate as with time the previous print is losing influence. It is the inevitable geometric progression. With the time new and new reasons appear to accelerate the fiat money issuance.
The final ending of all this is also absolutely logic and predictable…
April 4th 2013